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Scrutiny
  
You did what?!!
The govt deregulates oil prices – and takes the most dangerous step in our economic history to become a disaster prone ‘oil-shock’ economy
05/08/2010

Since when did deregulating oil prices become a sensible step towards boosting economic growth? Did we miss some lectures during graduation or were we altogether in the wrong Sheldonian Theatre course? Don’t get us pseudo Galbraithians wrong – we’re not against any oil price hike; in fact, we rabidly support it. But to undertake a flabbergasting decision to blindly deregulate oil prices – in order to allow it to fluctuate according to global oil movement vagaries – is the most dangerous step ever in India’s economic history. The act by India’s Empowered Group of Ministers (eGoM) of the United Progressive Alliance (UPA) to initiate the deregulation process of petroleum products a month back, fails to recognise that all global recessions in recent history have had a common cause for occurrence: energy price rice. Or are the memories of the 2007-08 economic recession already forgotten unbelievably?

Post the eGoM moves, petrol prices have already gone up by Rs.3.50 per litre. Though diesel price deregulation is on hold for now, prices have still been raised by Rs.2 per litre. Similarly, the price of the domestic Liquefied Petroleum Gas (LPG) has also been further hiked by Rs.35 for every 14.2 kg cylinder. Kerosene has got dearer by Rs.3 per litre to cut the government’s fuel subsidy, which stands at around $25.6 billion.

One does honestly appreciate the fact that India’s Finance Minister Pranab Mukherjee is quite serious at reducing the fiscal deficit burden – something he had mentioned in his budget speech with sincerity. To that effect, a calibrated price hike is completely logical, but a sudden deregulation is frighteningly irrational and a spectacularly risky affair. James D. Hamilton, Professor of Economics, University of California presented a benchmark paper drawing a correlation between oil price hikes and subsequent recessions. The recession that America witnessed during 1973-74 was preceded by the 1973 oil crisis when the members of Organisation of Arab Petroleum Exporting Countries or the OAPEC (consisting of the Arab members and Egypt, Syria and Tunisia) called for an oil embargo against US decision to re-supply weapons to the “Israeli military” during the Yom Kippur war. OAPEC decided to increase oil price by 70% to $5.11. Moreover, due to unforeseeable threat with regard to oil import, oil price went up from a mere $3 to a whopping $12 per barrel. The second oil crisis US went through in 1978 was due to the Iranian revolution which disrupted the oil production and supply from Iran. During this period, oil price soared from $15.85 per barrel to the historic high of $39.50 per barrel. This was followed by the Iraq-Iran war that had a huge impact on the severe recession during the 1980s. The relevance of the irrational price rise to the tune of $147 per barrel prior to the recent downturn cannot be given up either. Even the Dubai crash last year was due to the sudden oil price fluctuations. Rises in oil prices fuelled the real estate bubble and the subsequent fall almost brought the economy on its knees.
Though open market systems are good for oil companies (particularly private players like Essar Oil and Reliance Petroleum, who are at a disadvantage w.r.t. public sector players), it brings volatility at the consumers’ end. Immediate lessons by India can be derived from the Chinese energy market, which is based on the principle of managed-market-based economy. Gasoline prices are strictly controlled. Even the prices of key energy resources like coal are not free for the markets to decide. The National Development and Reform Comission (NDRC) of China openly interferes with the petroleum prices. The last time NDRC revised the wholesale price was in November 10, 2009.

The reality is when oil prices increase, it increases the overall cost of the economy. Moreover, when prices of crude oil go up, it also directly or indirectly increases the cost of other commodities. India has a huge consumption of around 133.40 MT of crude oil. The main reason why India was less impacted by recent recession was the controlled crude oil price policy. Imagine over 400 million middle class Indians paying for petrol at a rate of over $100 per barrel. Even India had no control over oil prices till 1973, but it didn’t pay rich dividends. One would remember that a belligerent decision to deregulate petrol prices was taken in 2002 but the government had to revise its decision later. A good parallel can be drawn with our stock markets. Till the time Indian stock exchanges were independent and separated, they were stable; the moment they were opened to the foreign players, they became volatile and left the investors vulnerable. Increase oil prices for all you must, but deregulating oil prices is clearly not the need of the hour; not now, not in the next few years – the government should immediately reverse the decision.

By:- Akram Hoque
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