International crude prices are surging to record levels and there are no prizes for guessing what all of this implies for India that imports the bulk of its oil. So far, the inflationary consequences have not been fully felt due to the limited ‘pass-through’ of global to domestic oil prices, thanks to huge subsidies. As the demand for oil keeps rising, the prospect of global oil prices hitting $150 a barrel this summer grows stronger.
The main reason why ‘oil pass-through’ is yet to be felt in India is simple: subsidies. Removing them will trigger political and economic tsuanmis. The moderate hike in petrol and diesel prices recently cover less than one-tenths of the revenue losses accrued by selling subsidised fuel. But even this has set off protests from Kashmir to Kolkata. As poll clouds loom over us, the UPA is under pressure to shield consumers as much as possible from skyrocketing prices. So subsidies are here to stay. But there is unlikely to be greater efficiency in the use of oil in the economy. Higher prices stimulate the need for greater conservation of oil and self-sufficiency in oil production. With prices likely to test higher levels of even $200 a barrel one day, India’s oil import bill is widening dangerously. As these prices are not transmitted domestically, there are no incentives in the existing regime to curb import dependence.
India is not responding to this impending crisis like other countries such as the US that have realised that global oil prices will remain high for a long time. True, there are exotic reports that farmers in Rajasthan are now rediscovering the humble camel as the cost of running gas-guzzling tractors soars. But apart from raising hopes that a fall in the population of the desert state’s signature animal can be reversed, such news doesn’t amount to much.
There will be more reports about farmers in other parts of the country shifting back to their trusty bullock carts. But in the big cities and towns, there is no evidence that Indians are beginning to change their driving habits or are moving to public transportation. Even though Americans pay only slightly less than what Indians pay at the pump — $4 a gallon or $1.06 (Rs 45.50) a litre vs Rs 50.50 a litre in Delhi — they are responding by driving less.
With retail gas prices zooming, Americans are also shifting to mass transportation, or buying hybrids or smaller, more fuel-efficient cars. During April, one in five sales in the US was of a fuel-efficient compact or sub-compact car as against one in eight a decade ago. A big casualty has been the gas-guzzling sports utility vehicles (SUVs) whose sales have dropped with the soaring oil prices. Iconic brands like the Hummer made by General Motors are now on the block.
Naturally, all of this is reflected in the divergent paths of oil demand in India and the US. While in India, it is expected to rise by 100,000 barrels per day (bpd), US oil demand, according to the US Department of Energy, is expected to shrink by 330,000 bpd. India is the sixth largest consumer of oil in the world using 2.6 million bpd or 3 per cent of the global demand. The Americans, in striking contrast, used 20.6 million bpd and account for a quarter of demand worldwide.
Besides the subsidy regime, a big reason why India’s oil demand will keep booming is the ongoing automobile revolution. The country is one of the biggest markets for small cars that are steadily getting cheaper. More and more people at the bottom-of-the-pyramid will soon get access to the world’s cheapest car made by the Tatas (and later the Bajaj-Renault-Nissan car). In this regard, the Finance Ministry’s move to tax luxury cars is unlikely to save much fuel, as these cars account for only a quarter of vehicle sales.
To be sure, India’s car revolution will trigger the search for alternative sources of energy like biofuels. In Chhattisgarh, for instance, all the cars of government officials (including the Chief Minister) run on oil from the black nut of a shrub-like tree called jatropha. India is trying to launch one of the world’s biggest jatropha biofuel projects in order to bolster its energy security, besides developing alternative energy sources like wind and solar power. But the oil age is not yet passé.
Efforts must be redoubled to step up domestic oil production to enhance self-sufficiency. Currently, self-sufficiency is around 25 per cent with imports accounting for 75 per cent of India’s oil consumption. India’s upstream major, the Oil and Natural Gas Corporation’s (ONGC) Mumbai High, which contributes 45 per cent to its crude production, is expected to experience a natural decline in its offshore production by 2012. India is furthering its interests by seeking oil supplies from Sakhalin to Venezuela, including volatile regions in Africa. But raising domestic production is equally imperative.
Towards this end, India needs to acquire the latest technology to foray into deep-water exploration. The best candidates for this are probably the Norwegians. They have experience in deep-water oil exploration, including improving recoveries from existing fields. India also needs to create a favourable policy environment for global oil giants to participate in exploration activities in the country. But all of this is possible only if a more rational price mechanism is in place that can lower demand and incentivise exploration.