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6-point strategy to stave off a staggering oil crisis

May 26, 2008 14:37 IST

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.

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.

B S Raghavan