International prices of crude have hit a high of around $46 to $47 per barrel. This rise in crude prices has an inevitable direct impact on Indian prices of petroleum products and a secondary effect on all other prices. The inflationary impact of global crude oil prices can be escaped only temporarily by trying to insulate the Indian public from the global prices through subsidies. Unfortunately, populist pressures have led the United Progressive Alliance government to succumb to the trend of modulating the global price impact by concessions on duty — both excise and customs — burdens on the oil majors like Indian Oil Corporation.

The original policy decision of the government, which was to make petroleum product prices based on import parity and reflective of global price increases, seems to have been modified to include the concessions. Obviously, this has to be at the expense of the fisc, which gets reduced excise and customs revenue. It also has an impact on the profits of refiners, both in the public and private sectors, who lose their margins following reduction of customs duty, which reduces import parity prices. For the present, “peace” has been established, albeit at a cost. The cost is mainly to the public fisc.

How long can we continue this farcical game of adjusting excise and customs duties and expect refiners to bear the costs of the rising prices of global crude? It is not often realized that the government is playing hide and seek. The rise in global crude prices and the resulting high petro-product prices are a reality. We can play the fiscal game only to a limited extent. That too will only transfer the fiscal burden from the users of petro-products to the general consumer. There is no such thing as a free-for-all in economics, especially in petroleum pricing.

The reasons for the latest hike in crude oil prices are many. Chief among them is the rising gap between demand and supply. Supply problems have increased due to the increasing political uncertainty in west Asia, exacerbated by problems of militancy. The troubles of the Russian oil major, Yukos, fighting its political battle with President Vladimir Putin, have also rendered its supplies uncertain. Add to these the Chavez factor — the political uncertainty in Venezuela. The demand on the other hand is increasing — thanks to the growing economic upsurge in the United States of America, China and India. There has been no significant addition from Korea’s proven reserves in recent years. Even existing fields are proving less efficient than before. Expert opinion is that Indonesia is turning to be a net importer and the United Kingdom’s North Sea oil fields are proving less robust. All this uncertainty weighs on the crude market.

Recently, there was a meeting of experts representing a group called the Association for the Study of Peak Oil. This group includes experts like Bakhtiari, head of strategic planning, National Oil Company of Iran, Colin Campbell, former executive vice-president of TotalFinaElf, and Matt Simmons, an energy investment banker and advisor to the controversial but influential Bush-Cheney energy plan. Reacting to the anguished cries of petroleum product-users at the recent crude price rises to $46 a barrel, Simmons is quoted as saying, “The figure I would use is $182 a barrel.” He bases this high figure on expert estimates of the real level of reserves — which are often quoted higher than actually justified — added to the continuing pressure of demand for petro-products.

Other participants in the ASPO meeting, such as Fatih Birol, chief economist of the International Energy Agency, admitted, at least in private, that these pessimistic estimates were justified. The fact is that for the time being there is no spare capacity to meet the growth in expected demand. Given that the global demand for crude and petro-products is expected to increase by 3 million barrels per day in the fourth quarter, the situation becomes even impossible since it involves a nearly 30 per cent leap in Saudi production. There will thus be a tremendous supply crunch in the last quarter of this year — which means prices of crude will go up into the sixties.

While the realistic estimates of experts indicate that the current rise of crude prices is only an indicator of worse things to come, we are being induced into a state of complacency through tax adjustments. This measure may fail when crude prices rise much further. More than the difficulty of fiscal adjustment and cross-subsidization by Indian refiners and petroleum majors like the Oil and Natural Gas Commission and IOC, we have a major balance of payments problem on our hands.

As it is, even at current crude prices, the fuel-related imports are burning a big hole in our BoP. The balance of trade is threatening to turn adverse as the crude bill climbs. Already in the first four months of the current year, the oil import bill went up by 62 per cent over the figure of last year. Imports of petroleum products stood at nearly $9 million for the period. The appetite of crude guzzling industries and automobiles will inevitably affect our BoP, supported as it is at the margin by remittances and capital receipts.

One can perhaps counter this pessimistic view by saying that while crude price rises reflect an effective tax paid by oil consuming countries to the producers and will adversely affect the gross domestic product of these countries, the immediate impact of oil price rise in west Asian countries may led to an increase in Indian NRI remittances. But this is a partial view. The effect of oil price increases is overall negative so far as GDP growth of developed and developing economies goes. The consequent adverse impact on our export earnings will also be primarily attributable to the crude price increases, albeit in a roundabout manner. The resilience of our BoP in the face of crude price increases is a difficult proposition. How long and how surely can we depend on software exports and remittances to support our increasing import bill for crude, especially in the face of the ever-rising crude prices?

This makes all the more imperative a careful approach to the whole issue of energy security. We should consider all possible and viable options to rescue our economy from dependence on external crude, especially in view of its prices, which are volatile. The case for a carefully articulated plan to reduce our dependence on such resources is made stronger in the light of estimates that crude prices are inclined to go up, much more than they are now.

It is time that the government of India does not rest on its oars with its so-called achievement of peace on the petroleum front at a huge fiscal cost. An action-oriented planning group has to be set up under the aegis of the Planning Commission to explore all options for energy security, including alternative sources of energy, conservation of energy and so on. The group should also initiate operational plans and programmes to develop alternative fuels, like hydrogen, to power our increasing population of vehicles. I am told that China is already well-advanced in this course of action. The group’s remit should include study of options to enhance the role of hydel power in our energy scenario, the expanded contribution of nuclear power and also bio-fuel sources. While there is great enthusiasm for sugarcane substitutes for gasoline, one has to look at its economics carefully, given the high usage of water and fertilizers. There is also the option of encouraging jatropha cultivation to yield diesel substitutes.

The time has come to take energy security seriously. We should not continue to be at the mercy of the new weapon of mass destruction launched by the Organization of Petroleum Exporting Countries in the shape of highly volatile crude prices. Our economy should not be a target of the uncertainties imposed by such phenomena, especially when we can evolve and implement alternate strategies to escape them.

The urgency of action on this front is at least as great as that which heralded the effort of our agricultural scientists, economists and statesmen in the Sixties and led to the Green Revolution. Food security was the goal at that time. Our new goal should be energy security, which is vital to the sovereignty and economic health of our nation. We should not fail in this challenge, however complicated its technological challenge and however difficult its economic implications.