The oil factor

Updated: Nov 28 2006, 08:38am hrs
Finance minister P Chidambarams contention that high oil prices shaved 1% off Indias GDP growth is no big revelation. Various studies have been predicting that for years. But his argument that the surge was a result of speculation and had nothing to do with the demand-supply mismatch is way off the mark. If the large flows to index funds over the past three years was the reason for the speculative activity, how come oil prices have fallen by as much as 22% even as these flows continue to rise Certainly, the high oil prices had a lot to do with burgeoning global demand, the US invasion of Iraq, and the sharp decline in stocks, which increased the sensitivity of oil prices to actualor, even potential supply disruptions. Moreover, spare oil capacity hovered at 2 million barrels per day (mbpd) in January 2006, down from a peak of more than 10 mbpd a decade ago. Recent improvements in spare capacity has helped soften prices in recent months, but the scarcity scenario, arising from the slow addition to global oil reserves, will ensure that prices remain high in the long term, irrespective of speculation or supply.

In the light of that reality and the fact that ours is an oil-intensive economyour consumption of oil per unit of GDP is around three times that of OECD countriesthe FM would do well to take a critical look at the measures taken to secure Indias energy security. Particularly if the UPA-led administration is to achieve those much-touted 9-10% GDP growth targets. Efforts to tap the countrys large coal reserves by opening up the mining sector have been stymied and imports continue to rise. Oil production has stagnated over the past decade and the shift to renewable energy has been slow and tardy. Just as importantly, the high price of oil is not the only thing that is holding back Indias growth. Revamping antiquated labour laws, power sector reforms, improving agricultural productivity and slashing wasteful government spending would more than make up for any losses on account of oil prices. Mr Chidambaram would be well advised to focus on these issues, instead.