The Kirit Parikh Committee is the third such committee to suggest decontrolling petroleum product prices. Probably politicians will again refuse to do so, and instead decree a modest increase in petrol and diesel prices.

Yet the key issue is not whether petrol and diesel prices should
reflect today’s oil price of $75/barrel. It is that booming Asia will
in a decade push oil to $200/barrel and maybe $300/barrel. India must
prepare for a world of scarce, expensive oil instead of pretending that
astronomical subsidies can ensure price stability.

Today, the “under-recoveries”, implicit subsidy, of oil companies is Rs
60,000 crore. The immediate price increases suggested by the Committee
may cut this to Rs 30,000 crore. But if oil goes up to $200/barrel, the
subsidy will rise astronomically up to Rs 500,000 crore, eroding funds
for all other anti-poverty and development initiatives.

In the 1990s, oil cost $16-17/barrel. When it doubled to $35 by 2004,
politicians refused to believe it was permanent, and decreed piecemeal
price increases instead of price decontrol. When oil doubled again to
$70/barrel by 2006, they cut excise and import duties and provided huge
subsidies rather than raise prices proportionally. And when oil shot up
to $147/barrel in mid-2008, they just closed their eyes and crossed
their thumbs.

Luckily for them, the global financial crisis and Great Recession then
sent oil crashing down to $40/barrel, saving them from facing up
immediately to a future of scarce oil. But the global economy is now
recovering, so that challenge must be faced.

The global recovery looks weak in Europe and North America, but is
gathering steam in Asia. China and India look like powering ahead at
12% and 9% respectively in 2010-11. Other Asian countries are also
buoyant. These developing countries are at a very energy-intensive
stage of development.

Booming Asia is sucking in commodity imports from Africa and Latin
America, fuelling booms there too. Slackness in rich countries has kept
a lid on commodity prices, but the long-term trend is unambiguously
upward.

China has already overtaken the US as the world biggest consumer of
cars and emitter of carbon. India is following in China’s footsteps,
one decade removed. So, even if oil consumption is muted in the West,
even if rich countries drastically reduce carbon emissions (which is
doubtful), oil consumption will rise stridently in developing
countries.

The world’s old oilfields are in steep decline, and large new oil
discoveries offshore in Brazil, Mexico and Africa are in deep waters
that will take time to exploit.

Indian politicians say it is politically impossible to decontrol oil
prices. They fear that freeing oil prices will stoke inflation, because
of the impact on transport costs. But in countries with free oil
pricing, like the US, inflation excluding food and energy has been less
than 1% although oil prices have doubled in the last 12 months.

It is simply untrue that price decontrol leads to inflation. On the
contrary it leads to efficiency, conservation and a switch to
alternatives. It will also reduce the fiscal deficit, and that will
tame interest rates and hence prices.

When I became a journalist in 1965, oil was decontrolled but steel was
controlled on the ground that it was politically impossible to free a
commodity so vital to the economy. But steel was decontrolled in the
1980s and proved no problem at all.

Why so? Because voters understand that commercial producers need to
sell at market prices, but know that governments can subsidise goods
indefinitely. As long as oil bears a political price, voters will
resist any price increase. But if oil is decontrolled, voters will soon
accept the realities of the market, as it already has for steel.

In 1974, when OPEC first flexed its muscle, the government doubled the
price of petrol overnight. It was a big blow of course, but the economy
adjusted to the reality of expensive energy. India adjusted again in
the second oil shock of 1980.

We now face another huge energy crunch, and need to adjust to that
reality too. After decontrol, we can replace the kerosene subsidy with
solar and LED lanterns for the poor. Farmers should switch from diesel
pumps to electric ones. Cooking gas cylinders can be replaced by piped
gas. Buses can switch to compressed natural gas. The poorest can get
cash transfers through smart cards to reduce their fuel bills.

We must stop massive subsidies for a non-renewable and polluting
resource. Instead, we must prepare for the coming reality of oil at
$200/barrel.

Source: Economic Times India

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