The oil-rich West Asia is in turmoil again raising heartbeats of many a nation like India which depends on imports for its oil needs. West Asia and North Africa produce more than a third of the world’s oil and the turmoil in the region threatens to unsettle this arrangement. As US, France and Britain began to bomb the Libyan territories the oil prices started soaring again, touching a new high. And there seems to be no immediate solution to this current crisis. One wonders if the world is headed towards yet another energy crisis at this juncture.
It started as a solitary spark in Tunisia. Virtually no one predicted the dramatic political turmoil will spread across the West Asia and North Africa so quickly. And it is very difficult to predict where it is heading for and eventual course of events, the destiny of thousands of people and their future; everything seems to be spinning out of control at this point of time. With millions of barrels of oil reserves, the stakes are really high. The big countries hardly can ignore the developments in the region. So a virtual war of control over this region has begun.
Due to the ongoing turmoil, oil exploration had come to a halt in Libya. Before the recent unrest, Libya was the world’s 12th-largest oil exporter, producing about 1.6m barrels of high-quality crude oil per day. However, countries like Saudi Arabia and other leading oil producing countries including Kuwait and the United Arab Emirates have increased their production to offset the shortfall.
Almost 60 percent of the world’s known oil reserves are located in West Asia and Persian Gulf. The US, the pre-eminent political and military presence in the region, imports almost a quarter of its oil from it, mostly from Saudi Arabia.
The US remains determined to dominate West Asia politically in order to prevent control over oil supplies falling into the hands of a potentially hostile third party that might use it politically and withhold supplies. In any case, the oil market is highly politicised whatever the prevailing price due to demand and supply.
China’s imports of oil are a prominent feature of the current oil market, accounting for a third of the increase in total global demand. By contrast, it used to be a net exporter in the early 1990s. India’s oil imports have also been rising because higher growth rates are stimulating increased consumption of all types of fuel. However, the US and Europe remain the major consumers and there is competition over oil extraction rights and anxiety about who controls them. Ultimately, demand is growing faster than supply, which implies prices will continue rising.
India is in a peculiarly vulnerable situation and its energy import planning efforts are mostly long term and on paper. It has little political clout in the world oil market. And, of course, India’s hapless migrant workers in the Gulf remit huge amounts to pay for its massive dollar denominated oil import obligations. Should they have to return home indefinitely owing to the troubles, India will face difficulties with its balance of payments. India has also embraced urban automobile transport without any heed to its fundamental irrationality today. Nor is there any systematic effort to improve the efficiency of oil dependent production and engineering units and the ONGC itself has been a rather dismal manager of India’s offshore oil assets. Long-term planning for energy and comparable issues is evidently beyond the capacity of the Indian polity.
The turmoil in North Africa and West Asia will put a spanner on budget planning one more time as Finance Minister Pranab Mukherjee himself had conceded this problem. Even if global prices of crude oil stabilise at around $100 per barrel, an increase in the administered price of diesel is expected in the second week of May — which may be accompanied by hikes in the prices of subsidised kerosene and cooking gas. All of which is certain to ensure that inflation will remain high despite government claims to the contrary.
On March 24, Mr Mukherjee expressed his concern in the Rajya Sabha about the rising oil prices due to instability in West Asia from where India imports most of its oil requirements. Two facts are important to underline: India currently imports around 80 percent of its total annual requirement of crude oil; and oil imports comprise one-third of the value of the country’s total imports.
In the recent past, international oil prices have been extremely volatile. During 2008, crude oil prices jumped from $40 a barrel to $147 a barrel before collapsing again to $40 a barrel. Though in 2009 and 2010, prices rose steadily to around $90 a barrel before spiking to a 30-month high of $120 a barrel in February, after the unrest in Tunisia and Egypt. The Indian economists have repeatedly failed to plan their oil requirements in view of the growing oil concerns across the world. Instead, Finance Minister Mukherjee says high global prices are a reality and one has to live with it. But the situation could deteriorate if the civil war in Libya escalates and similar events occur in other major oil exporting countries, which cannot be ruled in view of the highly politicized environment in the West Asia due to the importance of oil. A proper planning and creating awareness among the Indian public about the fallout of the oil crisis in the West Asia is lacking on the part of the Indian economists. Steps to encourage public transport system in major metro cities, where the auto sales are zooming by the day, would have brought a qualitative change and also reduced the oil burden on the exchequer. But that seems to be not happening in the Indian polity even after witnessing crisis after crisis in the West Asia.
In his Budget for 2011-12 presented on the last day of February, by which time prices of crude oil were on the boil, he curiously assumed that there would be no extra spending on oil subsidies. In fact, he actually pared the Union government’s total subsidy bill by Rs 20,583 crore, which is clearly unrealistic. Whereas the government deregulated petrol prices in 2010, the prices of diesel as well as kerosene and liquefied petroleum gas continue to be administered.
Diesel is the largest selling petroleum product in India in terms of tonnage as well as value, accounting for roughly 40 percent of the total value and around 60 percent of the total volume of all petroleum products sold. Importantly, diesel is the main fuel used for transportation. Higher diesel prices have a cascading impact on the prices of a very wide range of articles of mass consumption, especially food items. Since retailers tend to increase the prices of goods transported by a higher proportion than the rise in transport costs, a cascading impact occurs.
The administered price of kerosene went up from Rs 9.30 a litre in January 1998 to around Rs 12.50 a litre in June 2010 - still, the government subsidy on each litre of kerosene is Rs 18. All sorts of measures have been unsuccessfully tried to curb diversion of kerosene - from colouring it blue to putting chemical markers in the liquid. But the incentive to adulterate continues because of the yawning gap between kerosene prices and those of diesel and petrol.
Given the happenings in Libya and other West Asian countries and continued hostilities in the oil-producing nations, will lead to yet another major oil crisis in the world. And the likely impact on India’s economy will be enormous and India would still depend on imports for most part of its oil requirements. A proper planning to face the impending situation is clearly lacking on the part of the Indian leaders. The middle class and below middle class will have the bear the brunt of this the crisis and likely fallout of the oil turmoil. At least now, the Indian leaders should wake up to oil reality and plan for its future in a better way.