Battling the barrel

It is impossible to predict where global oil prices are headed, but 150 a barrel seems plausible. Half the world8217;s energy consumption is by the United States, China, India, Japan and South Korea. Compounded by the US slowdown, serious public policy trade-offs confront economies. First, there is the slowdown threat 8212; IMF data says developed economies will grow below trend, but developing economies will grow above trend, trend being interpreted as the last 10 to 15 years. Interpreted for India, the country will do better than 6.5 per cent, but worse than 9 per cent. Second, there is the inevitable trade-off between growth and inflation. Poverty alleviation requires growth, but fuel price-induced inflation has forced economies to hike interest rates. Third, India is no exception in not allowing domestic retail prices of petroleum products to be market-determined. And across developing economies, oil companies are often public sector, making navigation between the Scylla of increased budgetary costs and deficits and the Charybdis of higher fuel prices that may possibly hurt the poor a difficult one. Sri Lanka, Indonesia and Taiwan have increased fuel prices, since the subsidy burden was unsustainable. While the G-8, China, India and South Korea have proposed international cooperation to increase energy efficiency, the problem won8217;t disappear.

At best, oil prices will settle down at a slightly lower level, but nowhere near the 30 per barrel once witnessed. Notwithstanding demand management, growth 8212; especially in China and India 8212; will drive demand. Unlike the 8217;70s and the early 8217;80s, India8217;s oil problem is no longer a balance of payments one; besides, let8217;s note that India8217;s import basket is marginally cheaper than quoted Brent prices. India also exports petroleum products. Estimates, now dated, suggest a 5 increase in oil prices shaves off 0.25 per cent from India8217;s growth.

However, more than lower growth, India8217;s problem is one of not dismantling the administered price mechanism APM and targeting subsidies when the going was good. Both have been on the agenda for a long time and non-implementation of the former, combined with a non-transparent indirect tax structure, makes the link between crude import prices and retail prices impossible to fathom. Had the petroleum ministry sought to junk the APM four years ago, increases in retail prices would have been incremental and small, instead of a large one-shot increase. Refineries and marketing companies are bleeding and India is looking like a shortage economy once more.