With crude oil prices hitting a 30-month high, as Brent crude moved close to $120 a barrel, it was only natural that the Indian rupee and the markets took a beating on Thursday. Tunisia, Egypt and Bahrain are not oil-exporting nations, but Libya is. While Libya is only the world’s 12th largest exporter, it has reportedly cut at least 400,000 barrels of production per day (bpd) out of the country’s 1.6 million bpd. It is important to note that Libya is not a major source of oil imports for India, with a share of less than 5 per cent in Indian crude oil imports. India’s primary sources, Saudi Arabia (around 20 per cent), Iran (around 15 per cent), Kuwait, Iraq and the United Arab Emirates (around 10 per cent each) account for almost two-thirds of India’s crude oil imports. Supply from the region as a whole is unlikely to be disrupted unless the present unrest in the Arab world, dubbed the “Jasmine Revolution”, reaches the region’s core, namely Saudi Arabia. Saudi Arabia pumps around 10 per cent of the world’s oil supplies and is the only country with adequate reserves to meet a supply shortage created by any further disruption to Libyan supplies. Consequently, as the unrest spreads, analysts expect oil prices to continue to firm up.
The negative impact of these trends on domestic inflation, the government’s subsidy bill and the economics of Indian oil companies should be obvious. However, the medium-term impact of the current uncertainty should not be exaggerated and would depend to a large extent on how speculative activity is kept under check. It may be recalled that the sharp crude oil price spike in 2005 was largely on account of speculation. This time, the overall environment is even more conducive to one-way bets. If major suppliers and major consumers of oil keep an eye on speculation, it may be possible to moderate the spurt in oil prices on account of the uncertainty in West Asia. Perhaps France should take the initiative, as chair of G20, and call for a G20 discussion and action on oil prices. The last thing the world economy needs now is a slowdown in growth on account of the uncertainty caused by the situation in the Arab world and the Persian Gulf. As a member of the G20, Saudi Arabia can be urged to take steps that help stabilise both the region and the markets and ensure that adequate supplies are forthcoming.
At home, the government must make proper use of the extant environment by urging Parliament to accept the inevitability of raising energy prices, especially diesel, kerosene and LPG. Having politically welcomed the “Jasmine Revolution” and expressed its solidarity with the people on the Arab street, India’s opposition parties, especially the Left, should be mature enough to accept the logic of such social disruption in the Arab world. One cannot have one’s cake and eat it too. If you support revolutions and democratisation, then you have to accept the cost of such disruption and be prepared to pay it. What this means for India is higher petroleum and petroleum product prices.
