Bonded futures

The rising price of oil, combined with the government8217;s policy of controlling the domestic price of petrol, diesel and kerosene, is building up into a big crisis. When oil is at 128 per barrel, the way to discourage people from using oil is to make it more expensive for them. If we keep domestic petroleum prices at the level they were when world oil prices were half the present price, we are encouraging people to continue consuming at least the same quantity. If we continue consuming the same levels of oil, regardless of the price, our oil import bill will rise. Since our consumption is supported by the government and by oil bonds that cover the losses of oil companies, we can keep on making our grandchildren pay for our high levels of consumption. The question, however, is whether this is the best strategy for India.

As an oil importing country, it is in India8217;s interest to move towards technologies that are less intensive in the use of oil. There is today reason to increase investment in technologies that use less oil. A higher price of oil should reduce, in the long run, the demand for oil. The world saw that in the 8217;70s when higher oil prices led to more fuel efficient cars, increasing preference for small cars, and then a decline in oil prices. While price signals are correct in industrialised countries today, the difficulty is that the big consumers of oil, India and China, seem to be determined to keep their prices unchanged. There is then no reason why the price of oil should come down, since there is no disincentive to consumption.

It would be unfortunate if, instead of correcting price signals, the government allowed the crisis to deepen. Not only is its borrowing going up as a result of the oil bonds, but options such as rationing of petrol and a curb on new connections for LPG are now real possibilities as well. While it may fit the old socialist mindset that rationing is better than a price increase, in reality, it leads to levels of crime and corruption that the government is not in the least capable of handling. It will create a black market and adulteration. The government must correct its oil and energy policy before it is too late. The way it is playing out, India8217;s energy pricing policy could lead in the future to a much bigger economic crisis than the one the United States is facing today on account of sub-prime loans.