Storm clouds on energy front

EVEN AS the gyration of crude oil prices in the international oil market started to send shivers down the spines of economic and industrial policymakers in different parts of the world, the Indian Prime Minister, Mr. Atal Behari Vajpayee, told the U.S. Congress in Washington, with a discernible sense of pride that the Indian economy had not only held its course, even as much of Asia was convulsed by economic crises, but had even grown at 6.5 per cent per year, moving among the ten fastest growing economies of the world. Expressing the Indian determination to sustain the momentum, Mr. Vajpayee even spoke of the aim to double the per capita income in ten years requiring the Indian economy to sustain a growth rate of 9 per cent.

But in Delhi, the Minister and the mandarins at Shastri Bhavan, housing the Petroleum Ministry, were anxiously awaiting the return of the Prime Minister from his visit abroad to take the urgently required hard decisions on the liquid fuel energy front, faced as they are with the grim prospect of the oil import bill for the current year moving up from last year's level of Rs. 57,000 crores to well above Rs. 70,000 crores, and the oil pool deficit increasing from Rs. 6,500 crores on March 31 to over Rs. 9,000 crores by September beginning and likely to touch Rs. 13,000 crores by next March.

While the Ministry officials appeared to have placed much hope on a decision, taken in June by the Organisation of Petroleum Exporting Countries, (OPEC) to control production so as to keep crude prices within a band of $20 a barrel, the global oil market has been at its unpredictable best, with spot prices sent on a swing by reports of a likely military flare up between Iraq and Kuwait in West Asia, and a stormy weather in the Mexican gulf.

As spot prices have crossed $35 a barrel, with some analysts fuelling speculation of higher prices up to even $40 a barrel, the brunt of the crisis is borne by the governments of the U.K. along with members of the European Union, which getting its act together, has decided to send a political message that the current oil prices are ``unacceptable not only for European countries but also for the world economy and could have a negative impact on global industry''. Across the world, the 21 member Asia Pacific Economic Cooperation, (APEC) conveyed, after a meeting of Finance Ministers in Brunei that soaring oil prices could pose a threat to economic recovery in the world, and stated, ``In the light of rising world demand, we call for appropriate increases in supplies and other measures to promote long term prices stability in the mutual interests of consumers and producers''.

While the unconscionably high level of crude prices - upwards of $35 a barrel cannot be sustained for long and sometimes situational factors and market uncertainties can, occasionally, trigger a price spiral, there are some hard realities of the global oil market that have to be taken into account.

(a) The global oil consumption has, after the crises of the 1970s, settled down to a steady growth path, with consumption rising from 59.7 million barrels a day to 69 million bpd in 1995 and about 75 million bpd in 2000.

(b) The OPEC still supplies over 40 per cent of the world's oil need.

(c) While the high prices of the late Seventies and early Eighties led to the emergence of new oil sources in the North Sea and Alaska; the pace of exploratory effort elsewhere has somewhat slowed down with OPEC members re-emerging as key players, with their share of proven reserves increasing to 78 per cent from the 67 per cent ten year back.

It is the appreciation of these factors that led to expectations that in response to appeals from consuming nations the OPEC will relent at its September 10 meeting and take a favourable decision on oil prices. But all that the OPEC would offer was a three per cent increase, about eight lakh barrels per day, in output and this has hardly mattered to the market as even earlier some of the OPEC members had been producing in excess of their quotas. However, one can expect that eventually OPEC will play ball. As UAE's oil Minister, Mr. Obaid bin Saif-al Nasseri, explained in late August, ``OPEC is governed by many factors, some political and some economic and we hope that economic interest will prevail. Market balance requires co-ordination between producers to achieve their interest without harming world economic growth.''

Balancing of producer and consumer interest will be the key element in oil price though the financial needs of some OPEC members, apart from seasonal and situational factors, can occasionally exert pressures on the supply and price fronts. It had been speculated that about $25 a barrel would be a fair price, though the institutional mechanisms that could bring about this price and sustain it are nowhere in sight. Informed guesses and hunches, rather than well ordered negotiations continue to rule the world oil market.

Mounting import bill

The Indian context, is however, set by the Government retaining a market sensitive approach that seemed half ready to meet the market fluctuations. Crude prices which were around $19.20 a barrel in January 1997 came down to $14.15 in January 1998, falling further to $10.99 in late December 1998, before recovering to $12.40 in March 1999, $21.90 in September and $24.95 in November. During 2000, the price has been surging upwards of $30 a barrel.

India imported crude oil and petroleum product worth Rs. 35,629 crores (25.6 per cent of total imports) in 1996-97 Rs. 30,341 crores (19.7 per cent of total imports in 1997-98, and Rs. 27,064 crores (15.4 per cent of total imports) in 1998-99. During April- December 1999, the value of imports of crude and product was Rs. 33,046 crores, as against Rs. 20,237 crores in the corresponding period of 1998, reflecting the hardening prices.

By early 2000, Government appeared to be fully sensitive to the fact that global oil prices had increased by 37.8 per cent in 1999, reversing the fall of 31.9 per cent in 1998 and the Economic Survey, presented in February 2000 even indicated that with the sharp increase in oil price, the current account deficit is expected to widen between 1.6 and 1.8 per cent of GDP in 1999- 2000.

In this year's budget, with a view to providing some relief, the Finance Minister reduced the basic customs duty on crude oil from 20 per cent to 15 per cent and on petroleum products from 30 per cent to 25 per cent, expect on kerosene for parallel marketing, the basic duty on which was raised to 35 per cent from 30 per cent.

Stagnant crude production

India's main problem is not only the fluctuating oil prices, but the increasing import dependence and continuing stagnation of domestic production. It is significant that while the domestic demand for petroleum products has been growing at a steady rate of around 8 per cent, with the demand expected to go up to 110 million tonnes in 2001-02, the domestic production of oil which grew at 8 to 9 per cent in the Eighties, has been causing concern with a slowdown. Crude production fell from 35.255 mt in 1995-96 to 33 mt in 1998-99.

It had been argued in these columns (TheHindu, March 1, 2000) that reactivation of the oil sector was an urgent need, as ``there is a sense of complacency in the field and not adequate recognition of the risks of allowing the current stagnation in domestic production of crude oil and other products to continue while the crude oil prices are once again on the rise.''

During April-July 2000 cumulative production of crude was 10.75 mt, just above the target of 10.70 mt while the throughput of 17 refineries was only 33.20 mt against a target of 36.84 mt.

Given the daunting task of meeting the energy needs of the economy, while coping with the macro budgetary and balance of payment problems, the Petroleum Ministry is reported to be weighing the relative merits of three options (a) increase the prices of some petroleum products by reducing subsidies on products like LPG which has a subsidy of Rs. 163 per cylinder, kerosene which has a subsidy of Rs. 7 per litre and diesel which has a subsidy of Rs. 3 per litre (b) restructure the import duties on crude and petroleum products or introduce specific rates instead of the present ad valorem rates (c) issue oil bonds to cover the oil pool deficit. All three routes have been traversed before.

The Comprehensive Pricing Policy for Petroleum Products introduced in September 1997 had already initiated a phased reduction of subsidies, taking into account an element of import parity price, with a target date of 2002. The Ministry had also issued petro bonds in March 1998 to mop up Rs. 13,000 crores from the market, and reduce the oil pool deficit to about Rs. 5,000 crores, and the Finance Minister had reduced the duties on petro products, in Budget 2000.

There is a school of view that increase in petroleum product prices to reduce subsidies could trigger an inflationary spiral and should therefore be avoided. Rough estimates indicate that on current levels of consumption, the subsidy on kerosene works out to Rs. 8,000 crores, subsidy on diesel Rs. 1,500 crores, and on LPG Rs. 660 crores. The question is not whether subsidies should be reduced or not as this has already been settled by a policy decision with a time frame extending up to 2002. The current issue is whether it is necessary to contract this time frame, and if so, to what extent. In this context, it is necessary to take a holistic view keeping in mind that energy prices are a crucial element in economic growth.What is needed is not just a budgetary view of petroleum product prices, but an energy pricing policy that rationalises the consumption pattern and ensures that economic recovery is not sacrificed as the altar of budgetary balancing exercises.

Conserving energy, reducing import dependence and re-stimulating domestic production of crude oil and products should be the main elements of strategy to cope up with current pressures on the energy front.

V. K. Srinivasan

Hon. Director,

Indian Institute of Economics

* * *

OPEC turns 40

THE OPEC, a permanent, intergovernmental organisation, which marks 40 years of its existence, was formed at the Baghdad Conference of September 10-14, 1960, by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela.

The five founding members were later joined by eight other members: Qatar (1961); Indonesia (1962); Libya (1962); United Arab Emirates (1967); Algeria (1969); Nigeria (1971); Ecuador (1973-1992) and Gabon (1975-1994). Ecuador and Gabon had their membership suspended at their own request, with effect from December 31, 1992 and January 1, 1995, respectively. - OPEC.

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