Global oil prices are literally going through the roof, and developing economies like India are groaning under the burden of expensive imports. The conventional wisdom seems to be that there is no escape from passing on these high prices to consumers. But a holistic, long-term energy strategy can help India cushion short-term oil shocks.
The fact is international speculators are largely responsible for these high prices, and it does seem somewhat unfair that the unwary citizens of developing countries like India have to pay the price.
Most experts agree that the steep rise in world oil prices is not linked to the logic of supply and demand. Much of the blame is laid on market speculators who have pushed the price of crude to nearly $100 per barrel, a rise of about 64 percent since January this year.
Demand from countries like India and China has gone up but certainly not in a manner to warrant such a dramatic price spiral. Other factors behind the ballooning prices include supply disruptions in Nigeria, tension over Iran's belligerence and the depreciation of the dollar.
The situation clearly benefits the oil-producing cartel - Organization of Petroleum Exporting Countries (OPEC)- which held its latest meeting recently in Riyadh where the decisions taken are not of much solace to the developing world.
It has decided to keep oil production at current levels, despite initial expectations that it might increase output to soften the price outlook. India has already made strenuous efforts to convince OPEC to give a special discounted price for developing countries but this has not really elicited much of a response till now.
OPEC countries are acutely conscious of the fact that their hydrocarbon resources are finite and they clearly do not feel the need to provide any concessions to buyers, whether developing countries or developed ones.
Instead, they have been highlighting the role of their special funds for investment in developing countries, which, they argue, can provide some concrete support to such economies. In other words, the oil producers are not likely to provide much help to India in dealing with the latest crisis.
The situation has been compounded for the current United Progressive Alliance (UPA) government by the fact that assembly elections in several states like Gujarat and Himachal Pradesh will be taking place soon.
Any decision to hike retail prices of oil products like diesel, kerosene or liquefied petroleum gas (LPG) is bound to be politically disastrous. Petroleum Minister Murli Deora finds himself in the proverbial cleft stick with oil companies crying hoarse about their losses while Sonia Gandhi, the chief of Congress party that heads the ruling coalition, has issued a diktat against hiking oil prices right now.
The domestic oil companies including the Indian Oil Corp, Hindustan Petroleum Corp and Bharat Petroleum Corp have been making their case for a price hike with the petroleum ministry for several months now. Official estimates are that these companies are losing Rs.2.5 billion ($62.5 million) every day on sale of petrol, diesel, kerosene and cooking gas.
The losses are pegged at Rs.9 per litre on petrol, Rs.10 per litre on diesel and Rs.17 per litre on kerosene, while cooking gas is being sold at a discount of Rs.215 per cylinder. Total "under-recoveries", as these losses are termed, are being estimated at roughly Rs. 250 billion in the current financial year.
The solution that the government has been relying on in recent years is to seek support for these oil marketing companies from the still-profitable upstream oil companies like the Oil and Natural Gas Corp (ONGC), GAIL India and Oil India Ltd (OIL).
The huge profits of the ONGC have already been dimmed in the last two years as it has been forced to take on the burden of subsidy for oil marketing companies. In addition, the government has been issuing bonds covering some portion of the under-recoveries, which are to be redeemed at a later date by the oil companies. This compromise formula which is definitely a piecemeal and short-term solution is likely to be the final resort this time as well.
The real solution, however, lies in the long-term approach to diversifying the country's sources of energy supply. With petroleum likely to remain a high cost commodity even in the years to come, India has to become more innovative in the area of energy.
One of the solutions that Prime Minister Manmohan Singh had envisaged was to introduce nuclear energy. The controversial Indo-US nuclear deal was as much about searching for new energy sources as it was about forging closer strategic ties with the global superpower. Though nuclear power may always remain a small part of the energy puzzle, every segment is critical to completing the picture.
As for the short-term issue of hiking retail prices, it seems to be taking the easy way out to simply allow a pass-through to the consumers. The fact is that successive governments have not been able to come up with a long-term answer to the shortfall in energy needs and it has been easier to go ahead with expensive oil imports.
For a developing economy, raising prices will also fuel inflationary pressures and, perhaps, the political compulsions to keep prices low may force policymakers to become more innovative in their approach. This can include banking more on alternative modes of energy as well as allowing the ONGC to become more aggressive globally in buying up oil acreages.
Natural gas is yet another option that needs to be explored more intensively, especially since India is surrounded by nations that have natural gas resources. Though the Iran-Pakistan-India pipeline may be a non-starter, others could be viable from Central Asian countries or Myanmar.
In any case, all these can become part of a much-needed long-term energy framework. If the country is to overcome the current oil crisis, such a long-range policy requires to be framed urgently and put in place as soon as possible. Otherwise, India will continue meeting every successive oil shock with a short-term patchwork solution.
(Sushma Ramachandran is a writer on economic affairs. She can be contacted firstname.lastname@example.org)