No copycats, please

Updated: Nov 19 2005, 05:30am hrs
The governments proposal to set up strategic reserves of oil and gas is based more on a herd mentality than sound principles. Consider. The fundamental premise for setting up the reserves is that in times of supply disruption or high crude oil prices, release of reserves will quell the market and mitigate high retail consumer prices.

But what is the cost-benefit tradeoff Crude oil has always been available for a price. The question is if it makes sense to sink Rs 9,000 crore of taxpayers money (not to mention the annual carrying and maintenance costs) to moderate prices during transient periods whose occurrence or tenure cannot be predicted. On the face of it, the recent storms in the United States put to rest doubts on the need for oil reserves. But, scratch the surface and the fact is crude oil prices did ease from over $70 a barrel during the storm to $57, once the US released some reserves.

The question is, are we equipped to deliver such signals and ensure price corrections Remember, the US is one of the largest consumers of oil and is also home to leading global oil majors. This point is relevant, since there were few takers for physical purchase of the reserves oil, going to show the speculative aspect of the crude oil price. Admittedly, we are the fifth-largest consumer of oil in the world but, evidently, the oil markets are far more than a function of demand and supply. In fact, given the prevailing price controls arising out of populist tendencies, strategic reserves will become yet another instrument to book political profit. The need of the hour is to let price signals freely determine demand. In fact, China, which is building strategic oil reserves, is in the process of deregulating energy prices.

The argument in favour of building natural gas reserves is far more distorted. At the retail level, its consumption is minuscule. And, industry contracts gas on a long term, take-or-pay basis. Further, gas reserves are relevant for the West, since retail consumption for heating during winters is significant. Surely, oil policies can do without the slick!