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Oil worries

IT NOW SEEMS more than likely that the international crude oil price will not come down in a hurry despite the recent effort by OPEC to bring the price down from the 10-year high of $35 reached earlier in the month.

On September 10, the oil cartel increased its official output level of 25.4 million barrels a day (mbd) by a further 800,000 barrels, the step-up being the third since March when production was raised by 1.45 mbd, to be followed by a 710,000 barr els-a-day increase in July. Interestingly, in March, the oil price had climbed to a nine-year high of $32 a barrel, and OPEC acted to keep the price within the $20-25 range. At the time of the July 1 output increase (the decision was taken on Jun e 21), the cartel's reference basket of seven crudes was selling at around $29 a barrel, the target price then being $25. When increasing its production last Sunday, cartel Ministers reportedly said that their objective was to get the price down to the $22-28 range.

Indeed, one school of thought (headed by the OPEC president, the Venezuelan Oil Minister, Mr Ali Rodriguez, himself) is that the crude price may even hit $40 because of the underlying tightness in the world market. Global demand has risen, squeezing inve ntories especially in the US where they are at their lowest for 24 years. With most oil producers and refineries working almost to capacity, on the one hand, the winter demand ahead for heating oil in the northern hemisphere can only make the market tigh ter. At the consumers' level in Europe and the US, the situation has been compounded by the high taxes on products. In fact, OPEC itself has stated that ``only 16 per cent of the revenue from a barrel of refined oil in Europe goes to oil exporters, the r emaining 84 per cent comprising taxation and the take of refiners and marketers''.

Petroleum products are not subsidised in Europe and the US, and the issue there is a relatively simple one of either reducing taxes on products or reducing the price of crude charged by producers, or a mix of both. In this country, since products of mass consumption are subsidised and their prices kept under control despite an existing framework pegging them to international prices (as in the case of diesel), the issue essentially boils down to keeping the Oil Pool Account deficit (which basically measu res the gap between world and domestic prices) under control. Given the steep increase in crude prices, the OPA deficit is expected to touch Rs 15,000 crore by the year end compared to Rs 6,300 crore at the end of 1999-2000. The magnitude of the problem becomes clear from the fact that when the OPA deficit sailed past Rs 18,000 crore three years ago, the Government introduced the oil bond scheme, in September 1997, to ease the resource crunch the oil companies faced.

Clearly, this time too recourse will have to be had to such a measure which will insulate to some extent the oil companies from the adverse effects of non-payment of their dues from the OPA. Second, the Finance Ministry will have to be persuaded that, gi ven the emergency situation on the oil economy front, it will not be proper for it to keep to itself all of the windfall increase in proceeds from higher Customs revenue resulting from the steep increase in world crude prices, estimated at Rs 15,000-17,0 00 crore by the Union Minister for Petroleum, Mr Ram Naik. A reduction in imposts (including Customs and excise) to some extent could help reduce the OPA deficit without seriously disturbing the Centre's planned efforts at controlling the overall fiscal deficit which, in any case, was not supposed to rely on a favourable fallout of rising crude prices in the first place.

The States may be loathe to reducing the uniform floor rate of sales tax on motor spirit (a stand they have already reportedly taken) because, unlike the Centre, they have not yet reaped a windfall in tax proceeds. They will if retail prices go up and m ust therefore be persuaded to give up at least a share of that. Tinker one might with taxes but there appears to be no alternative to increasing the prices of diesel, kerosene and LPG, the subsidy on which has reached levels which simply cannot be justi fied on strictly economic grounds. Since the OPA deficit is increasing by more than Rs 500 crore every month, it is imperative that a decision to keep it under control is taken directly on the Prime Minister's return from the US.