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Oil and the World Economy

Oil price has been rising rapidly. It has crossed the $50 a barrel level and has almost touched $55 a barrel. There are no indications of its coming down substantially in the near future. Twenty months ago, it was selling for less than $30 a barrel. In one year the increase in oil price comes to 70 per cent.

In the days to come no major oil company in the world is to open new oil wells. In the North Sea and as many as 48 countries oil production has been on the decline. Thus the imbalance between the demand and the supply of oil is sure to increase in the days and months to come. At the same time the daily demand for oil is to rise by 20 lakh barrels. This is based on the estimates by the International Energy Agency. Besides America, China has emerged as a very big consumer of oil and the reason behind this is its continuing higher rates of economic growth. Both these countries demand low-sulphur oil which is limited in supply. The other countries especially developing ones that cannot afford them have to remain content with inferior types of oil.  

The rising oil price is sure to have an adverse impact on the prospect of the world economy in general and of developing countries like India in particular. It is obvious from the changing mood of the IMF, which is no longer enthusiastic about the prospect in the next year. Its recently published World Economic Outlook has already scaled down the rate of growth of the world economy in 2005 to 4.3 per cent from 5 per cent estimated for 2004. Since the IMF has made this forecast on the assumption that the average price of oil would remain at $37 a barrel, but as the situation stands today, one would have no hesitation in declaring it as utterly unrealistic. It has been estimated that, for every ten dollar increase in the average price of oil, there is a decline of 0.6 per cent in the average rate of world economic growth.

If the price of oil continues its upward journey, most Asian economies will be adversely affected. According to a recently published report, the people from Mumbai to Manila are fearful of the impending danger of inflation. If the governments bring changes in their monetary policies, they will pose a danger to economic growth by making bank credit more expensive and thus pushing up the cost of production. There may be a veritable shortfall in investment. Any appreciable fall in production will, instead of reducing the inflationary pressure, will create shortages in the economy, which will push up the rate of inflation. Thus a vicious circle will be created.

Increasing prices of oil products may produce public resentment and discontent. Governments may try to soften up their impact by reducing import duty and excise in addition to giving subsidies on them. This may restrain for sometime the impending popular anger from bursting but the financial position of the governments will be badly affected. In order to reduce the budgetary deficit, they will have to resort to increasing taxation in other areas and to public borrowings, which will also have harmful consequences.

The only feasible alternative appears to be to economise in the use of oil and there is ample scope for this. The Asian countries in general and India in particular use more oil per unit of output. Thailand and China use twice as much oil as rich European countries and America, but India is ahead of these two neighbours because it uses three times more oil per unit of output. This statement is based on the estimates made by the International Energy Agency.

India could have reduced its consumption of oil, had it introduced such technology in production that would have required much less oil per unit of output. Besides, India should have developed alternative sources if energy available indigenously. Ever since Independence proper stress has never been placed on developing public transport system. Had metro rail and tramways been developed from the 1950s onwards, the demand for private cars could not have increased as has been witnessed since 1980s. Even now no efforts are being made to make public buses clean, comfortable and punctual with cultured people as drivers and conductors. Had public transport been dependable, a large number of people would not have bought private vehicles. It is needless to add that lots of problems like pollution, congestion, parking difficulties, etc. would have been avoided. It is not even now too late to ponder over the problem and rethink policy concerning public transportation.

At present, the Government of India spends $140 lakh every year on subsidising kerosene oil and cooking gas. Besides, by reducing taxes on them, it loses $54 crore. The public sector oil refineries and distributors of oil products too have to incur huge losses. In the days to come the government has to devise ways and means to meet this situation that may aggravate if oil prices continue to increase in the world market.

Since India does not itself produce enough oil to meet its needs, which have been continuously increasing, its dependence on imports is bound to increase. It has to face higher and higher import bill in the future. At present it may not feel the pinch because it has around $120 billion as foreign reserves. There is, however, a huge opportunity cost that the country has to bear. Had the import bill kept lower, the country would have got huge resources to invest in order to generate output and employment opportunities.