A double - front oil attack
A double - front oil attack
Global oil prices around $80 have already put India's macroeconomic and
import watchers on red alert. This won't be the first battle fought. India
had to go through this last year, when crude oil spiked to $147. Matters
calmed when the world economy slipped into recession, sharply lowering oil
demand and, hence, the price. Now, prices are marching upwards again,
prompting questions about oil's future outlook.
The world scene, reflected by the International Energy Agency (IEA)'s World
Economic Outlook 2009 released on Tuesday, makes for one battle front. IEA
predicts global oil demand to rise from the 85 million barrels per day (bpd)
that it is now to 105 million bpd by 2030 supply more or less matching.
India and China will consume more, but West Asia will also produce more. Not
too bad, right? However, the Guardian reported this week that, according to
an IEA whistle-blower, these figures are distorted. Apparently, owing to US
pressure, the agency has made rosy estimates presumably to downplay concerns
that oil has already hit its production "peak". We don't know if this is
true; but "peak oil" concerns, existing since the first oil shock in the
1970s, have now strengthened. The theory, best expressed by US scientist M.
King Hubbert, suggests that oil production resembles a bell curve, which
will have to reduce after hitting a peak. After a point, it will take a
barrel of oil worth energy just U drill for one, nullifying net gain. And
even if companies wanted to invest in technology to ease production, the
downturn has dampened chances as IEA notes.
That leaves India staring at $80 oil, a front that may well be advancing
over time.
But there's a second front. Made up of the government's regime of tightly
regulating oil prices, this one behaves more like a fifth column.
Considering India imports at least 70% of its oil, oil companies bleed red
when global prices increase but the government refuses to alter local ones.
To finance under-recover-ies, worth at least Rsl03,908 crore in 2008-09, the
government last year had to resort to off-balance sheet bonds.
The longer this continues, the more the fiscal deficit widens. And the
longer it takes for deregulation, the longer the market is denied price
signals depriving domestic oil firms the chance to channel investment, and
also possibly skewing consumption.
India may or may not win against the first front. But unless it does
something against the second front, it will lose the war for fiscal sanity
and energy stability.
Mint, New Delhi, 12 November 2009
