Towards rational pricing of oil
Painful as it might seem in the short run, India would be far better off with higher oil product prices if they reflect inevitable current and future global realities.
Those who have been protesting against the recent price increases in petrol and diesel need to accept two major realities. Firstly, in the short run, passing on the global price increase in crude oil to the consumer is inevitable, unless the government was to be saddled with mounting deficits as a result of subsidies on oil products or the oil companies be burdened such that they turn bankrupt, much like the country's state electricity boards.
There is really no possibility of a free lunch for consumers, as long as oil prices continue to remain high in the international market. Undoubtedly, any increase in oil product prices would have an upward impact on prices of all goods and services, given the fact that oil is used largely as a fuel for transport. But this reality cannot be countered through artificial measures and policies.
Over a period of time, the country has to move towards more efficient use of oil products, such as through improved public transport, including the Indian Railways. While the country's population of motor vehicles is expanding rapidly, there is also the need for improving the fuel efficiency of models that enter the market.
The next Budget must necessarily target efficient vehicles for lower taxes and those that are poor on fuel efficiency taxed at a higher level. Perhaps there is also need for the government to lay down regulations for the automobile manufacturers to improve the overall fuel efficiency of the mix that they produce, much like the US has had in existence since the late 1970s and through the 1990s.
The second reality that the public in India has to understand is the major hazard of continuing on the current spiral of increasing oil consumption. In very simple terms, it can be stated that the growth of oil consumption in China and India is now creating a tangible effect on global oil prices, and, of course, North America continues to increase its consumption despite recent increases in prices both in the international market and at the pump for the average American consumer.
The outlook in the aggregate gives rise to serious concerns. India itself is likely to increase its consumption from 2.6 MBD per day in 2004 to 5.2 MBD by 2030 according the to International Energy Agency (IEA). TERI's projections using the MARKAL model corroborate these figures. Overall global oil demand is projected to increase from 82.1 MBD in 2004 to 115.4 MBD in 2030.
In order to meet this demand, a significant shift in the geographical distribution of oil exports would have to take place. For instance, while in 2004, 22.8 MBD of oil was produced in OPEC nations of the Middle East, by 2030, this would have to double to around 44.0 MBD.
There are serious geo-political implications of this shift, but based on the assessment of probable reserves and their exploitation, this level of increase will have to take place in Opec Middle East if the total production has to reach 115.4 MBD in 2030. There is a strong probability that production and export may not be able to reach this level within the next quarter century.
As long as the world encounters what Sheikh Yamani once described as - a nice tight situation - oil price increases will take place periodically when these tight situations occur from time to time. Undoubtedly, the world will reach equilibrium with higher oil prices as they drive down demand far below projected levels.
Such an adjustment could, however, prove traumatic for India, particularly if we continue to add to our stock of vehicles and make our economy even more dependent on the growing use of oil. Painful as it might seem in the short run, India would be far better off with higher oil product prices if they reflect inevitable current and future global realities. It is only in response to these higher prices that we may be able to reduce our dependence on oil over time.
However, it is essential that the government takes simultaneous measures to strengthen the functioning of the Indian Railways in which certainly a good beginning has been made, and with our towns and cities establishing efficient public transport systems.
Even more important than the increase in prices of diesel and petrol is the fact that government has announced that future product price increases will be in the hands of the oil companies. If this intent can be implemented effectively, it would restore the rational system that was intended to come in place in 2002 as part of the reform and liberalisation of the hydrocarbon sector and dismantling of the Administered Price Mechanism (APM).
The government would also do well to look at options by which the subsidy on kerosene and LPG could be targeted in a more focused manner, so that it is only those below the poverty line (BPL) who can benefit from the subsidised prices. It is entirely possible for the government to introduce a system of smart cards by which households identified as BPL can receive a certain quantity of subsidised kerosene and LPG every month.
This would allow the ending of a general subsidised price for these two fuels, which in the case of kerosene leads to large scale adulteration of several petroleum products, and in the case of LPG only subsidises middle class urban consumers who certainly have the ability to pay the full price of LPG.