The Hindu : THE BURDEN OF HIGH OIL PRICES

Online edition of India's National Newspaper
Wednesday, Mar 24, 2004

Opinion

Opinion - Editorials

THE BURDEN OF HIGH OIL PRICES

INTERNATIONAL OIL PRICES, which have been at exceptionally high levels in recent weeks, threaten to push up domestic costs all round and derail the ongoing reform process in the hydrocarbon sector. On March 18, the price of the benchmark Brent crude shot up to an unprecedented $38 a barrel in the London market; it continues to rule firm. At current levels crude oil prices are higher than they were a year ago, when the prospect of a war in Iraq caused an upsurge. This time there is no single cause and hence no early expectation of softer oil prices over the near term. There are reports that the United States, which uses up a fourth of the world's supply of petroleum products, is adding to its relatively low stockpile by importing oil and oil products aggressively. Venezuela, a leading OPEC member, is facing political turmoil. In another development, the oil cartel has been debating its recent decision to cut down supplies of crude by about one million barrels a day from April 1 but indications are that the majority of OPEC members will stand firm. The failure to restore normality in Iraq is another contributing factor. The most proximate cause, the devastating terrorist strikes in Madrid, highlights the uncertain geopolitical situation and aggravates the problems of oil supplies.

For India, which imported 73 per cent of its crude requirements for the fiscal year ended March 31, 2003, the sticky oil prices have deep, negative implications. Crude prices have firmed at a time when the domestic demand has been increasing on the back of an economic recovery. Oil imports will actually be higher this year, amounting to three-fourths of this year's consumption. Most of the recent supplies would have been contracted for at the prevailing high prices. According to official estimates, the country's crude oil import bill is going to jump up from $16.5 billion last year to $20 billion. That kind of escalation is worrying even for a country with a relatively comfortable balance of payments and burgeoning external reserves. The immediate worry is inflation, which will be fuelled by the higher oil prices. A whole range of macro-economic policies starting with interest rate policy might have to be reworked.

The high oil prices heighten the uncertainties of the ongoing deregulation process in the petroleum sector. Beginning April 1, 2002, the prices of the transportation fuels, gasoline and diesel, have been decontrolled. Consumers are already paying more than they used to pay since retail prices are being adjusted to international prices. Transparency in pricing and the ushering in of competition — the two benefits the reform process was supposed to bring to consumers — have not been achieved. In honour of the general elections, the Government has chosen to freeze kerosene and LPG prices. This means, of course, that public sector oil companies distributing these products are bearing the brunt of the international oil price increases. Besides, even though domestic marketing of petroleum products has been thrown open completely, not many private players have been enthusiastic. A thrust on exploration, always important, gains a certain urgency at the present juncture. For all its success — there have been significant gas and oil finds in the Krishna-Godavari offshore area and in Rajasthan — the new exploration licensing programme has not attracted any big international names for the forthcoming rounds. Places such as Kazakhstan with proven reserves are preferred to the relatively unexplored Indian continent. Viewed in any way, the country has a long way to go before its dependence on costly imported oil is reduced.

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