6-point strategy to stave off a staggering oil crisis

[K.Karthik Raja]

6-point strategy to stave off a staggering oil crisis

May 26, 2008

India has somehow weathered the previous oil shocks, but the current
one poses the worst threat yet to its economy. Oil price may soon move
past $150 per barrel and as per some expert predictions, it will climb
close to $400 per barrel by 2015.

The government will need to do a lot of outside-the-box thinking to
stave off a catastrophe in the making.

The mind-boggling losses of Rs 200,000 crore (Rs 2,000 billion) of the
oil companies have to be made up if they are not to go bust. Oil bonds
are just pieces of paper and do not compensate for the outgo in real
terms.

Raising the prices of petrol and diesel notionally is neither here nor
there, and only puts off the evil day. Tentative tinkering will only
mean the double jeopardy of the crisis continuing unabated and stoking
the fires of inflation.

Oil to hit $200 a barrel, says ace Indian analyst
If, as constantly pressed by the Left, the government pares down the
taxes and duties on petroleum products, it will straightaway make a
huge dent of Rs 71,000 crore (Rs 710 billion) or so, on the resources
for investments aimed at inclusive growth in the social sector under
the banner of Bharat Nirman.

At a time when the ruling price is crossing all rational bounds,
harping on stale, old recipes will not do. The government must take
courage in both hands and put into effect measures drawn up with
national interest as the sole criterion.

The possible outline of a strategy is presented below:

1. Decide on raising prices of petroleum, diesel, et cetera on a
rational basis. Until now, the hikes in prices of petroleum products
have been arbitrary, with no rational goal of plugging a given
percentage of losses. It is time the rise is what it takes to make
good, say, 30-40 per cent of 'under-recoveries.' This will at least
have the advantage of being sure of a predictable outcome.

2. Make the owners of cars feel the pinch. If one has money enough to
buy a car, one must have commitment enough to contribute to the
nation's good. The government should feel no hesitation to impose an
annual differential petroleum surcharge of, say, Rs 5,000, on ordinary
cars and Rs 10,000 on luxury cars. With 15 million cars on the road,
this will yield roughly Rs 5,000 crore to the public exchequer.

3. Constitute a high-power, high-profile team to visit capitals of
receptive petroleum producing countries to negotiate bilateral deals
at concessional rates. Venezuela, with the largest oil reserves in the
world, and a prospective production of six million barrels per day,
has already committed to supply one million barrels per day to India.
Other similar offers can be explored.

4. Revive the proposal of forming a buyers' cartel with major oil
importing countries like the United States, Japan, Germany, China,
India, France, South Korea and so on. The buyers' cartel could
negotiate a price with the oil exporting countries at a markup of,
say, 50 per cent above costs, as against 500 per cent at present.
After purchasing oil from the producing countries, the buyers' cartel
could release the oil in the market and let demand determine the
price.

5. Ban speculation on oil by banning its trading on commodity
exchanges. This, in fact, is a suggestion mooted by India which should
vigorously canvass for it in international forums. It is common
knowledge that hedge funds, banks and pension funds have poured
capital into oil trading in recent years, and raging speculation has
been pushing prices to levels many times higher than what they should
be.

6. Publish a White Paper. The government should take the nation into
confidence on its oil policy and its impact on the economy in the
short, medium and long terms.

B S Raghavan is a retired IAS officer who was a member of the Joint
Intelligence Committee, Director of Political and Security Policy
Planning in the home ministry, and chief secretary of a state.