THE PROSPECT OF the price of crude oil breaching the $55 a barrel mark has set alarm bells ringing. As the Economic Survey for 2004-2005 has indicated, the crude and petroleum product import bill for India this year will go up significantly because of higher world crude prices. Thus, in April-October, the Survey points out, the share of these imports in total imports was 30.4 per cent, the corresponding figure for the same period in 2003-2004 being 26.4 per cent. Clearly, even if — as the Union Petroleum Minister, Mr Mani Shankar Aiyar, has argued — the ample foreign exchange reserves are more than adequate to look after the increase in the import bill (the import bill for 2003-2004 was around Rs 80,784 crore), the development should cause concern as the economy's dependence on crude imports is slated to increase from around 70 per cent to nearly 85 per cent in the next two decades.

Mr Aiyar has also sought to play down the impact of the price increase on the economy on the ground that the world's largest oil consumer, the US, is likely to take appropriate measures to cool down its economy. This, along with the end of winter demand, is almost certain to reduce crude prices and restore a measure of stability to the market. But the point to note is that the world's crude supply has become highly inelastic today with a cushion of less than 2 million barrels a day (mbd) which can meet a sudden demand spurt. As the International Energy Agency has pointed out, "the reality is that oil consumption has caught up with installed crude and refining capacity".

Indeed, as the IEA has reported, the current spurt in prices is entirely the result of the global demand forecast being raised by 330,000 barrels a day, to 84.3 mbd, representing an annual growth average of 1.8 mbd. The IEA says that the revision is solely the result of "very cold weather in late February and early March, a more robust view of US economic growth, and the impact of this and other factors on China's oil demand growth prospects". The US Department of Energy has estimated a 2.5 per cent demand growth while OPEC puts the figure at 2.11 per cent, both close to the IEA's estimate of a 2.2 per cent increase.

Recent reports suggest that OPEC is not likely to fuel the crude price rise further by adopting a "hands-off" stand on the production levels of its members, a line it did not hesitate to adopt last year when the crude price went through the ceiling. In fact, it is expected that this time the organisation will discreetly encourage members to continue producing more oil than is permitted by the existing production quota system. Considering all this, it can be reasonably expected that the crude price will stabilise in the weeks ahead and get back to a more acceptable below-$50 a barrel level. Incidentally, the average price of crude imported by India is currently much lower because of the composition of the import basket which comprises the cheaper Dubai and the costlier Brent varieties in a 57:42 ratio (last October, when Brent scaled an all-time high of $56.4 a barrel, the Indian basket was priced at $43.88). Even so, New Delhi will have to treat every peak in the world crude price as a grim reminder that its oil economy is basically weak and that steps need to be taken as expeditiously as possible to strengthen its fundamentals.

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