Crude prices came off their declining trend in mid-March 2002. The proximate cause was the soon to be dispelled notion that the US had come super-quick round the depression corner. But prices did not really tank with the realisation that the gloomy economy was here to stay for some time. The factor that took over the fortunes of daily ups and downs of crude prices was the likely armed conflict in Iraq. Every time, the talk of war moved an inch forward, crude bounced up a couple of dollars. And thus it continued through the second half of 2002, inching ever closer to the $30 mark and then falling back to $25/26 per barrel (bbl). Till the Venezuelans came along with their strike and the picture got a bit murky. The weather window for the war in Iraq is believed to begin mid-January and close end-March so D-day cannot be that many weeks away. Crude crossed $31 in the closing hours of 2002, to fall back to $29, as oil exporters talked of relaxing quotas further. But prices will once again cross the low-30s, and then the mid-30s, as the next steps in war mobilisation begin. The North Koreans have queered the pitch a bit, but are unlikely to affect the course of the juggernaut in the Persian Gulf.
India imports some two-thirds of her crude oil requirements, and we of course hurt when crude prices go up. In the first Gulf War, it hit us so hard that it tore open a crisis in our fragile external payments front. Nothing like that is going to happen this time around. Not just because our external balances are way much sounder and foreign exchange reserves immensely larger, but our managerial skills have got much improved. India of the days before the 1991 reforms, was the land of the bleat. Anything and everything that happened took our leadership perennially by surprise. Victim-hood was the strategy first and last: So, bleating suitably pitifully, government would call upon Indians to make sacrifices, and call upon foreign governments to be generous. The state-owned oil companies would await on instructions, and tinker with some hare-brained scheme for rationing.
But things are changed now, even if the oil companies remain in government hands. In the first quarter (April-June) of this fiscal year, contract prices were lower by 15 per cent over the previous year, while refinery throughput was up by 5 per cent. This should have meant that the oil import bill ought to have been 10 per cent lower. Instead of which the value of oil imports was higher by 11 per cent. Something like $1 billion of excess oil contracted at around $22/bbl was brought into the country in the first quarter. Part of this enhanced inventory was perhaps consumed in July, which month saw a decline in the oil import bill by 27 per cent, despite higher refinery throughput. It was back to the stocking-up mode in August though, which saw the oil import bill rise by 24 per cent. Then it was a surge: in September the value of oil imports rose by 72 per cent; in October by 44 per cent and in November by 45 per cent. For the period in which these shipments were contracted the ruling prices were not much different from that obtaining in the comparable part of the previous year. Which means that the increase was due to higher volumes alone. Thus, over the course of this fiscal, government oil companies seem to have shipped in at least 2 months, if not 3 months equivalent of imports: In anticipation of both higher prices and conflict in the first months of 2003.
With 23 months of buffer, we are unlikely to either contract dear oil later this month or in the next, or be vulnerable to shipping disruptions in the Gulf. The war itself is unlikely to last for long, but it will create the right climate for government to trim a substantial part of the subsidy burden. It is a credit to the powers that be to have resisted the temptation to brag. Much indeed has changed since 1991.
The author is economic advisor to ICRA (Investment Information and Credit Rating Agency)