Oil at $70 needs rapid responses

Expectations are that high prices of crude will not go away. The average oil prices paid by India have risen from US$ 28 in 2003-04 to aroun...

Expectations are that high prices of crude will not go away. The average oil prices paid by India have risen from US$ 28 in 2003-04 to around US$ 51 per barrel in April-June ’05. The total oil bill is in excess of Rs 150,000 crore. This is a huge tax being paid by the nation to oil producers, and its effects are evident. Current account balance deteriorated from a surplus of US$10.5 billion in ’03-’04 to a deficit of US$ 6.5 billion in ’04-’05, and the deficit is likely to cross US$14 billion this year. The rupee is under pressure and will continue to be so as interest sensitive capital flows ease when US interest rates rise. Merchandise trade deficit is doubling every two years with liberalised imports and growth in services exports are unable to compensate for this. There are concerns about inflationary pressures and likely declines in external reserves. The reasons for the higher prices — that a cyclone in the US can add so much volatility to the spot markets — are not hard to find. Current global supply is around 83-84 million barrels a day and there is little scope to increase this significantly. Global oil production will peak within the next decade. Much of the world’s conventional oil is coming from old and over-exploited mega-fields that are becoming less productive. Higher prices may not lead to substantially higher supplies.

A permanent change in oil prices to today’s levels would cause GDP to fall by 1-2 per cent in most countries. Overall net transfers from importers to exporters of oil are estimated to be around US$ 1500 billion by ’07 — around 3.5 per cent of world GDP, and this would amount to a recycling problem of increasing complexity, both from an economic and political perspective.

During past crises, India had to look for unique solutions. It is time again to do so. Immediately, media and the public are concerned with retail prices, the oil companies with their balance sheets, and politicians with the impact on the electorate. Tariffs that were relevant at US$ 30 a barrel are no longer relevant at US$ 60 a barrel, and a simple reading of refinery margins, both public and private, would show that differentials between crude and product import duties (currently 5 per cent for crude and 10 per cent for petrol/diesel) need to be done away with, as is the case in most countries. This would reduce consumer burden by one rupee per litre. Reducing excise duties and removing roads cess, could yield another rupee. Price manipulations of monopolistic retailers need to be carefully scrutinised, and easily 50 paise per litre can be shaved off. Even the US does not allow local crude oil production to be priced at international prices, and there is no need to allow ONGC to do so. This would yield 50 paise in price adjustments. A more difficult but necessary step would be to forge consensus among states on a ceiling on sales tax levies on petroleum products, or a moving away from an ad valorem rate to a fixed rate of sales tax, which can still protect their revenue expectations. Finally, some increase in all prices, including kerosene and LPG, is inevitable, and needs to be done.

Story continues below this ad

All of the above requires to be done fast and the larger dimensions of the problem tackled. I remember the attention to energy issues in ’80-’83, that restored energy security for over a decade. We need to revisit those strategies. It is important to have transparency about estimates of growth of energy demand. The Planning Commission’s report on energy needs to be publicly debated. The ’80s strategy focused on development of coal mines and investment in thermal power generation, conservation in petro products, incentives for renewables, and investing in exploration. A cabinet committee and a group of secretaries met periodically to make things happen.

The opportunities today are similar. Some 28 coal projects awaiting clearance, and could when completed add over 7000 MW to power generation capacity. There are a large number of hydro projects, in the public and private sectors, awaiting clearances. A special thrust on getting all these started in the current year could yield around 8000 MW of capacity within four years. It is also vital to leverage the recent Indo-US agreement on nuclear power generation to start up several new plants. China is already investing in over 20000 MW of nuclear generation capacity.

Availability of reliable power would help ensure that trade and industry consumption of petroleum products does not increase rapidly, and there could be greater focus on ensuring availability for the transportation sector. We had good success in conservation two decades ago, there is no reason that more cannot be done. Alternatives including renewables, bio-diesel, and ethanol, need to be pursued for results within two to three years.

Finally, we should be able to continue to access world oil. The petroleum minister’s efforts to secure equity oil overseas are laudable, but need now to be taken to firm commitments. Focus on implementation of strategies is likely to yield results. The last year has been weak on implementation, and it is hoped that the price of $70 a barrel would galvanise action.

The writer is a former petroleum secretary