Barrels of truth

In an economy dependent on imported oil to fuel growth, high oil prices act as an indirect tax on consumption.

By charging oil speculators (read: oil producers) with having ‘robbed’ India of a full 1 per cent increase in economic growth, Finance Minister P Chidambaram brought two critical issues to the forefront. First, the inexplicable volatility in world crude oil prices in the recent past. It is difficult to counter his argument that while a ‘demand-supply’ imbalance may have led to oil prices surging from $ 40 to $ 78 per barrel, no such imbalance was visible when prices fell from that peak to around $ 55 per barrel. The inevitable conclusion is that speculation in world oil markets have led to this volatility. The second issue is more subtle but far more telling. India may be heavily dependent on imported oil, but exporters of all kinds, oil included, need Asia’s third biggest economy and the world’s second-fastest growing market just as much. Volatile spikes in oil prices threaten not only India’s prospects, but also the stability of the world’s economic system. As a study by the Worldwatch Institute pointed out, if India and China were to consume global resources at the US’s current per capita levels, “it would need two planet earths just to sustain these two economies”.

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Sustainability is the key. Several studies have shown a strong correlation between economic growth and oil prices. The big oil price shock of 1979 pushed India’s already low rate of GDP growth down by over 5 per cent, while pushing the inflation rate to a whopping 20.2 per cent. More importantly, in an economy dependent on imported oil to fuel growth, high oil prices act as an indirect tax on consumption. This is true of all energy-hungry economies. India’s use of oil has doubled since 1992, while China went from near self-sufficiency in the mid-Nineties to the world’s second largest oil importer in 2004. Despite being giant customers, the two nations have little say in fixing oil prices. Hu Jintao’s stress on enhanced Sino-Indian cooperation in energy was, therefore, no coincidence.

Mr Chidambaram has already outlined a possible solution — a price band within which prices could fluctuate, but which would still offer a reasonable price to oil producers, while allowing importing economies to limit the impact of volatility. China’s weight behind the move would greatly improve the chances of this working. It is time the two Asian superpowers played some hardball.