Millennium Post

Oiling India's growth story

Oiling Indias growth story
Large oil-importing and consuming countries including India and Indonesia, which bear the additional social burden of ever-escalating fuel subsidies to insulate their poor people from global oil price gyrations, heaved immense sighs of relief when the 12-member Organization of Petroleum Exporting Countries (OPEC) decided not cut output to shore up its sliding crude prices in a meeting on 27 November. Since the mid-1960s, the Vienna-based premier commodity cartel has been agonising over declining crude prices from $114 per barrel in June to approximately $65 per barrel now.  

India, which imports more than two-thirds of its oil requirements, has a variety of crude products representing a derived basket comprising of sour grade (Oman and Dubai average) and sweet grade (Brent genre) of crude oil. Indian basket crude oil, which averaged $107.97 in 2012-13 and $105.52 in 2013-14 per barrel, has been averaging around $99.46 till recently. It is providentially plummeting in the wake of a close to 40 per cent dramatic drop in global crude prices. The OPEC’s latest decision not to cut output poses a very aggressive test for US shale oil. The price war against US-based shale oil has left the market awash with oil. Consequently crude prices are sure to stay comfortably low for the present. This offers a golden opportunity to countries like India to undertake some policy changes by keeping the lower priced imported crude duly stored in caverns. Such steps need to be taken  now to insulate itself against future spikes in spot prices that remain as uncertain and dramatic as the recent decline.

No doubt, authorities have been taking painful measures to contain the huge outgo on crude oil import down the years in a losing battle to cut import cost, trade deficit and inflation, besides the burgeoning fuel subsidy. Although the administrative pricing mechanism (APM) was dismantled by the erstwhile Vajpayee-led government way back in 2002, petrol/diesel/gas prices were seldom set free, lest various user constituencies should find the going tough in the wake of unrelenting rise in global crude prices.

This was so even as the global crude prices shot up too fast to afford or sustain the attendant bloating subsidy bill. Such price cuts positively affect domestic oil marketing companies (OMCs) that earlier had to bear the daunting burden of rising rates. Spike in crude prices would cause serious concerns even within their normal operations with swelling under-recoveries. Hence, the previous UPA-led government resolved that the price of all petro products including petrol and diesel should be market-determined and be appropriately adjusted by the OMCs. Since 17 January, 2013 the government authorised OMCs to increase the retail selling price of diesel in the range of 40 paise to 50 paise per litre per month (excluding VAT) and sell diesel to all consumers taking bulk supplies directly from the installations at OMCs at the non-subsidised market determined price. This was initiated by the UPA government, despite its absolute dependence on allies for survival in taking tough decisions that might earn the displeasure of all fuel-subsidised constituencies.

However, the Modi government that came to power in May this year received a sort of reprieve with the steady fall in the global crude prices especially in the last couple of months. It took the boldest step of totally decontrolling diesel price in November. The prices of such commodities are now determined for all consumers by the market. This meant the diesel subsidy exacting 0.3 per cent of GDP last year would now be off the burden of the exchequer henceforth in one fell swoop.

In the case of kerosene, the quota has been rationalized over the years for the State and through it to the public distribution system (PDS) so that the subsidy burden could be lessened. For cooking gas or LPG, effective 12 September, 2012, the government decided to cap the supply of subsidised domestic LPG cylinders for each domestic LPG consumers to six cylinders (14.2 kg) per annum, though this was subsequently increased to 12 cylinders since January 30, 2014 in the run-up to this year’s general elections. But in one of its far-reaching incremental reforms, the new government launched Modified Direct Subsidy Transfer of LPG (DBTL) scheme in mid-November in 54 districts for direct transfer of subsidy on LPG.

The scheme is proposed to be extended to the rest of the country effective from 1 January, 2015 so that diversion of domestic LPG or cornering the benefits of targeted category by unscrupulous elements with nefarious designs can be thwarted. As a result of all these decisions taken over the last couple of years by both the erstwhile UPA and the present dispensations, the under-recoveries sustained by the OMCs which stood at Rs 92,061 crore for diesel in 2012-13 fell to Rs 62,837 crore in 2013-14 and to Rs 11,656 core in the current fiscal up to 18 October, 2014, the Minister of State for Petroleum & Natural Gas Dharmendra Pradhan said in a written response in the Lok Sabha. One is led to be optimistic that the OMCs under-recovery burden would definitely be alleviated, if not eliminated.

Even as the evolving lower crude oil price scenario would enable saving on import bill and the concomitant lower pressure on subsidies to be effectively utilized for capital expenditure on competing development programmes including national oil companies’ upstream activities, the authorities should take steps to make green energy and unconventional sources including solar, wind, thermal and biomass more attractive through pragmatic supportive measures.

It is also time India beefed up its strategic energy security through the Indian Strategic Petroleum Reserves Limited (ISPRL) that is setting up strategic crude oil reserves with storage capacity of 5.33 million metric tonnes (MMT) at three locations viz, Visakhapatnam, Mangaluru and Padur (near Mangaluru) to enhance the energy security of the country. It is also time the government dusted off a blueprint prepared by the Engineers India Ltd (EIL) for the ISPRL a detailed feasibility of study for construction of additional 12.5 MMT of strategic crude oil storages in Phase II at four locations of Bikaner, Rajkot, Chandihol (Odisha) and Padur. Once on stream these seven storage facilities of 17.83 million tones requiring less than $10 billion at today’s cost, against the oil import bill of $143 billion in 2013-14. Coupled with extant commercial storage of crude and products vested with the oil companies, such a strategy would go some way in according energy security against uncertainty in future supplies of oil in a volatile market.

Energy experts contend that the gratuitous opportunity of soft global crude price must be seized by India to strengthen its long-term energy security through the construction of more storage caverns for oil, orchestrate conservation programmes among all oil-consuming segments and make a conscious shift to green and unconventional energy by degrees.

As the Modi government chants its “Make in India” mantra to drive domestic manufacturing, energy is the linchpin and more the country is able to save and diversify its sources, the better it would be for securing and succeeding in its manufacturing mission, policy experts say. IPA
G Srinivasan

G Srinivasan

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