Editorial: Oil Crisis No. 4

It may be counter-intuitive to argue that oil prices will climb during a year in which most of the leading economies are slowing down. Yet, global oil prices have been climbing sharply, hitting a new high of $122 per barrel on Tuesday. What is worse, the trend of price forecasts (including from representatives of the Organisation of Petroleum-Exporting Countries, or Opec) points to still higher prices, going up to such previously unthinkable levels as $150-200 per barrel. Perhaps the world economy is not really slowing down (the United States has so far avoided a widely-predicted recession), and perhaps growing consumption in rapidly-growing centres like China and India is enough to send prices over the top because even a 5 per cent scarcity in an essential commodity with no easy substitute can send prices soaring. India's crude oil imports in the last financial year increased by about 0.5 million barrels per day (mbd), while China's would have increased even more. Global demand is growing by about 1.3 mbd, on a base of 87 mbd; so it is clear that if China and India continue to need more energy to fuel their growth, and if the already energy-hungry economies do not reduce their own demand for oil, then global demand will continue to rise. On the supply side, there have been periodic disruptions in oil-exporting countries like Iraq and Nigeria. Without additional production "" and Opec has firmly turned its face away from any such goal "" the only possible outcome is higher prices, especially since alternative fuels like ethanol have quickly become a source of controversy.

 

How does India deal with the issue? It may be wise to remember that all three previous oil price surges led to political and/or economic crises, in 1973-75, 1979-80 and 1990-91. A crisis this time round can be prevented only with focused action. For starters, it should be obvious that we cannot have more of the same "" ie virtually fixed retail prices for petroleum products, and a ballooning subsidy bill "" because that will mean the end of all fiscal correction. The average import price so far this year is about twice as high as it was three years ago ($106, against $56). The net import bill has already climbed in two years from $38 billion to $64 billion; if prices stay at current levels, this year could see the bill balloon by another $20 billion, at which point the net oil import bill would eat up roughly half the dollars earned from goods exports. Any further price increases would be on top of that. It seems possible therefore that the current account deficit will climb to the unprecedented level of 3 per cent of GDP "" a situation that could put downward pressure on the rupee, and slow down if not reverse the accumulation of foreign exchange reserves. If India slips into a large twin-deficit problem, then the only solution will be to slow down growth by curbing demand.

Yet, the consumer feels none of the pressure from this extraordinary situation "" and will probably stay insulated because the government is already battling inflation in a pre-election year and is in no mood to take anything resembling a harsh measure. The result is that there are no price signals being conveyed that will squeeze consumption on the margin, or facilitate the search for alternatives. Additional domestic supply could give some relief, but it remains unclear as to when the privately developed oilfields will start delivering significant output.