Oil Subsidy

Some interesting statistics appeared in a recent issue of International Herald Tribune. It reads
“ Asia accounts for only about 20% of global oil consumption, but accounts for about 2/3 rd of the annual increase in global oil demand. Most of the rest of the increase comes from oil exporters like Russia, and Midle east where prices are low and economy booming. Oil consumption in the developed world is declining slowly”.

Why is this so. The answer is not far to find. “ No other region subsidizes oil like Asia” continues the article . Hard facts again - Oil subsidy in Malaysia and Indonesia this year will be around $15 bn each while India’s budget deficit , including off the books oil subsidy could be around 9% of its GDP , quoting from the article. As per International Energy Agency the total subsidy in 2008 is around $100bn twice as much as last years.

What are the implications for India. First, India being heavily dependent on oil imports, the consequences are serious indeed . Higher import bill, arising out of higher demand in a subsidised oil economy, contributes to increasing trade deficit with attendant impact on the value of Rupee which has already weakened substantially in recent past. Inflation will then be bound to rise. By subsidizing we interfere with the price discovery and end up paying unrealistic price which is bound to have an impact on the economy . For countries that are heavily dependent on oil imports such impact can be debilitating. Secondly, money allocated towards oil subsidy is at the cost of allocation to more needed sectors such as health, education and poverty alleviation where a greater proportion of the population stand to benefit .

What is therefore needed urgently is a policy to disincentivise production and use of fossil fuel. We have to encourage thrift in oil consumption in order to prepare for the eventuality of a depleted oil, a resource on which our industrial society has completely depended so far . And when that happens by and by, it will be nothing short of a shock far greater in magnitude than the oil shock of the 70’s when the world first woke up to the oil crisis. Will we be able to cope with that. Will we be able to tell our people that they have been given fuel real cheap but now they have to do without fuel.

It is here that alternative sources of fuel assume great importance . The reason why other sources of fuel have not been able to supplant petroleum is that these are yet to become commercially viable. For that to happen greater thrust in research funding is needed. Also needed is setting targets for switching over to alternatives fuel. A case in point is that a simple step as ethanol blending can go a long way in our efforts to start bringing down the demand for petroleum. Another one is biodiesel. Yet it is seen that activity in this area has slackened with the continuous fall in crude price experienced recently. Again commercial considerations come into play. Pricing aspects of sugarcane which is the source of ethanol need to be looked into so that ethanol blending is commercially attractive to oil companies. The same is true for production of biodiesel where it needs to be made attractive for investments to flow in, for, without investments in the sector very little can be done.

In the meantime improving fuel efficiency of automobiles, increasing share of railways in goods transportation and improving public transportation to wean away people from using personal transportation can be a near term actionable area.