FE Editorial : Don't wait for $ 100/barrel

Fri, Oct 23 12:22 PM

One of the very few unpleasant side-effects of a global economic recovery steadily gaining momentum is the impact that it will have on oil prices. Oil prices, which hit a peak of nearly $150 per barrel in the summer of 2008, have been falling since then and went down all the way to below $40 per barrel in the depth of the crisis. Now, the price of oil is hovering at about $75 per barrel, just above the level at which oil marketing companies in India begin to make substantial losses under the administered price regime. The UPA government seems intent on not raising the prices of oil products, even though economic logic dictates that a hike is probably necessary at the moment. One wonders if that stance will at all change now that three important assembly elections are over with the UPA on the side of victory. Unfortunately, given the government's continued reluctance to liberalise oil pricing, a carryover from UPA-I's and NDA's tenure, there isn't much reason to be optimistic about a liberalisation of oil prices in the near future.

That would, however, be against the interests of not just oil marketing companies but also the fiscal deficit which has to bear the unnecessary burden of subsidy to OMCs at a time when public finances are already stretched to their limits. The near future of oil prices is likely to be in the range of $75-100 per barrel. At any rate, the only way from here seems upward, given the faster-than-expected global recovery. And once the US and Europe genuinely regain positive momentum, the price may rise further still. Opec has clearly stated that they do not intend to increase production in the near term. However, they have also said that they do not wish oil prices to rise above $100 per barrel—that will put immense pressure on an already weakening dollar. And, given that most oil exporting nations still take payments and hold assets in dollars, they may eventually contrive to ensure that prices don't move beyond $100 per barrel. That is hardly consolation for India, though as OMCs begin to incur losses around the $65 per barrel mark. Instead of waiting for global prices to touch $80 or $90 or beyond and then affecting a big hike in consumer prices, the government would be better advised to take the first step now when the pressure isn't that great. It would, of course, be even better if they dismantled the administered price mechanism altogether.

Inside News

Editor's picks