An unusually harsh winter in the northern hemisphere is making the world turn its gaze on crude oil prices that are now within kissing distance of $100 a barrel. The nervousness is entirely warranted. The International Energy Agency estimates the world will have consumed 2.47 million extra barrels of crude oil a day in 2010, a big reversal from last year when demand actually shrank by 1.15 million barrels every day. Between July and September, the West almost matched rising energy demand from industrialising countries like China and India, a theme likely to be played out recurrently as more nations climb out of recession. The Organisation of Petroleum Exporting Countries, the most powerful cartel on earth, is reluctant to expand its spare capacity that set in after the 2008 financial meltdown. Analysts see the supply buffer evaporating as soon as 2012. Oil price projections are naturally being revised upwards.
India is just about recovering from a year-long struggle with food inflation. A spike in crude prices now could undo much of the work that went into slowing the rise of food prices to under 9%. Though on the face of it the government has greater control over oil prices at home than it has over food, the simple expedient of imposing a price ceiling on, say, diesel works counter to the objective. By not allowing crude oil prices surges to Indian consumers of diesel, the government encourages wasteful expenditure that ignores market signals. India's petrochemicals demand grows nearly 1.7 times as fast as the gross domestic product; it does not matter who foots the oil bill, it will keep growing unless we find cleverer ways to burn the energy we need.
A move to review diesel prices is, therefore, a step in the right direction when oil companies are losing R4.8 a litre by selling it below market rates. In the 12 months to March 2010, the government paid out a fuel subsidy of R71,300 crore. Free fuel prices are a precondition to reducing the tax burden petroleum carries in India. Although the government does not put out numbers, conservative estimates suggest half the excise duty collection in the country is from petroleum products. Even with a subsidy in place, diesel costs much more at an Indian gas station than it does in the US. Part of the reason for India's relative lack of competitiveness among Asian manufacturing exporters is its expensive energy. India needs to focus more on dismantling its high-cost energy economy.