Energy quotient

Should the Indian consumer continue to be protected from the rise in world oil prices? While most agree that low inflation is a desirable objective, is it desirable to achieve low inflation by artificially keeping the price of oil products low? As oil prices rise, and show no particular signs of going back to the old levels, the economy needs to adjust itself to this. If it does not, the government will not only end up bearing the subsidy bill 8212; whether by itself or by imposing it on oil companies 8212; but also in encouraging the consumption of oil in a world where its prices is much higher. Oil is a scare resource. The issue is not merely one of importing the major part of oil that we consume, even if it were available in the country, there would be a high opportunity cost of consuming it, and not selling it.

The short run price elasticity of oil 8212; the amount by which consumption of oil changes in the short run when its price changes 8212; has usually been observed to be low. Given technology in use, consumers can reduce consumption of oil by making some behavioural changes. However, the long run price elasticity of oil has been observed to be high. Over the long run a higher price of oil creates incentives for adoption and development of technology which is not intensive in its use of oil. Either the use of alternative sources of energy becomes more profitable, or companies invest in fuel efficient technologies. This has been seen in the automobile industry in which significant R038;D went into the development of small, fuel efficient cars because consumers all over the world wanted them.

At the present moment there is scope for keeping oil prices for the consumer low by cutting import duties further. The government should bring these down to zero per cent for crude, intermediates and petroleum products. This will put an end to the endless multi-decade lobbying for higher protection for the petroleum industry and about the impact of petroleum prices on government revenues. There should be no question that the government or PSUs should not be protected while hurting the larger interests of the people. After that there is a case for letting the domestic price of oil move up with higher international prices. It will help producers, consumers as well as the government to rethink energy use. Not only can the government not afford to keep oil prices low for long, if international prices continue on their way up, it is not good policy. Consumers may complain for a while, but as seen in the past, over time prices adjust.