Not a well-oiled system

The days of easy oil are over and there is no longer sufficient headspace to manoeuvre economies

Hardnews Bureau

Congressmen know it in their hearts, but cannot speak in so many words as it would mean criticism of their own government. One of the major reasons why the Congress performed badly in Karnataka was the inability of its government at the Centre to rein in prices. The BJP, expectedly, made price rise a major issue in its election campaign and reaped considerable political dividends.
The happenings during the run up to the Karnataka elections would seem like child's play when the full implications of a global price increase in oil to $135 per barrel starts falling on Indian consumers. The UPA government, in its elections year, has been understandably circumspect and cautious over how much it should increase the price of oil so that it does not hurt the political fortunes of the ruling coalition as it goes to the people. Even if this means ignoring for the time being the financial misfortune that has befallen downstream on companies like Indian Oil Corporation, Hindustan Petroleum and Bharat Petroleum. The Petroleum Ministry is hoping that it would resort to the same old devices of using oil bonds to tide over the current crisis, but there are certainly limits to doing that. Also, the government could try to bring down the import duty of oil further and reduce excise duty to make the price of oil more manageable. After all, there is a sizable indirect tax component in the price of oil in India. For oil, it is about 60 per cent, and for diesel it varies between 35 and 45 per cent. This means price of petroleum products could be absorbed considerably in the same duty structure by reducing duties.
After the administrative price mechanism (APM) was dismantled, the government began using an import parity pricing (IPP) policy for select oil products. IPP would be what an importer would pay if he chooses to buy from an international refinery and after insuring it ships it to India. By any account, the imported refined oil is very expensive. Since India refines its own oil from indigenous and imported crude, this gives Indian petroleum refineries substantial refining margin when global crude prices begin to soar. But IPP is just a notional figure that includes all kinds of taxes and duties. It is not the real reflection of how much petroleum products costs when they are refined in India. The imposts padded on these products help the government fulfill many of its objectives of progressive taxation.
Ideally, the government should go back to administrative price mechanism even if it means antagonising some of the private sector refineries. Any cost benefit analysis would show that such a move would have greater good for the greater number. Politically, too, it would be a wise move. The moot point, however, is whether the Petroleum Ministry has the courage to antagonise the oil majors that have begun to control the market.
There are varying views on why the oil is boiling. Many believe the price would come down to $80 after investors move from commodities to some other sector of the economy, once the balance is restored. Others are not so sanguine. The alarmist sentiment is that the days of easy oil are over and there is no longer sufficient headspace to manoeuvre economies as when oil was tight due to extraneous reasons like war or other disruptions. The oil crisis that is staring the world is unlike the one that the world has seen in 1973-74 during the Yom Kippur War or in the wake of the Iraq war in 1991. This crisis stems from declining Saudi oil wells and absence of new discoveries since the 1970s. The situation is aggravated by the rise in demand for oil in China and India. Americans are losing their sleep over the galloping gas prices, but the impact on poor countries would be catastrophic. India, in the short run, may survive the crisis due to its high growth rate, but there are no guarantees that it would not bring misery in its wake in the medium term. Worse, the oil crisis is seeing a transfer of resources into the hands of the oil majors and some other oil rich countries, who due to the enormous economic clout that they wield, could reorder the global system. One wonders where India would fit into this.