The oil, in recent past, has been at the center stage; apart from fueling economy it’s fueling the critical national & international politics. More importantly the recent developments continue to demonstrate the relevance of oil in the world economy. The current surge in crude oil prices is not new to the Indian economy; however there are two aspects which could be worth pondering over: the repercussions of the oil shocks and subsequent resilience of the economy. There is most certainly a third aspect as well (to which most of the readers will agree) and that is the lack of vision the successive governments have shown in reducing the dependency on oil. But we would leave it for the government in command to ponder over in detail.
The last four decades have seen a series of oil shocks, yet since the Indian economy has been in different stages of development the impact of the shocks have been varied. India came face to face with the first oil shock in 1973. This was the year in which Arab countries realized the power they wielded through OPEC. The outbreak of Yom Kippur war and nationalization of oil companies by Iraq led the oil prices to increase manifold. The domestic economy being a net importer of crude oil came under severe pressure. According to the statistic from Centre for Monitoring Indian Economy (CMIE), 1973 became the first year after independence when not only industrial production declined but the spiraling inflation also threatened to mar the consistent growth rate of yesteryears. Fortunately for India a severe decline in demand forced the OPEC nations to take measures for lowering the oil prices.
A few years later the outbreak of Iran war caused another steep rise in oil prices. But 1980’s witnessed a much higher rate of investment and consequently the decade saw the Indian economy growing at an annual rate of 5.5%. Unfortunately during the late 1980s India relied increasingly on foreign borrowings. Hence when the Gulf war caused another oil shock India had already got into the balance of payments crisis. To come out of the crisis the government had no option other than take measures of economic liberalization. According to Anushree Sinha, Senior Fellow at NCAER “ The subsequent policy changes did lead to a temporary decline in the GDP growth rate and increased inflation rate but in a long run the opening up of the economy has resulted in India emerge as a global player and play a prominent role in the development of the world economy.”
Here again in 2008 we are witnessing another oil price upsurge due to myriad reasons: geopolitical affairs concerning Iran and other oil producing countries, financial speculation, continuous weakening of dollar, just to name a few. The cascading effect of such a rise has already started to impact the macroeconomic statistics. The inflation figures have already crossed the double figure mark. “The slowing of IIP growth from 6% last year to 3.8% in the current fiscal is surprising and of course, worrisome “said a visibly flummoxed senior economic advisor to the government. Fortunately for us the kharif crops harvest is expected to be good but then a steady rise in oil price will push the transportation cost higher and any hopes of cooling down of primary articles’ prices may just disappear.
Hence even though the adverse effects of a steep oil price rise have reduced, we continue to have a high level of dependence on oil and thus it still continues to play havoc in overall growth story. This however does not undermine the strength of Indian economy. According to an analysis published by Energy Information Administration (EIA), the world oil consumption in the last three decades has undergone a definitive shift which substantiates the above argument. While in the 70’s and 80’s US and Europe had an ever-increasing rate of oil consumption, the last two decades have witnessed the two Asian giants India and China take prominence. Further with recession looming large over US economy the OPEC countries, as in the past, would not like to see oil demand going down due to higher prices. Therefore the analysts argue that a long period of spiraling oil prices may not be here to stay.
But countering a high level of oil dependency with sheer economic prominence can prove to be disastrous in the long run. India, which is projected to become the seventh largest consumer of energy within a decade, has to tread path cautiously in the coming years. There are lessons to be learnt from other countries’ experiences. The 1970’s showed how demand and supply, inelastic in the short run, eventually give rise to conservation and new production. The figures indicate that the OECD countries now consume less than one third of total oil consumption down from two third in early 1970’s. This is partly due to the strict conservation policies followed by the governments of the industrialized countries as well as the conscious research and development of alternative sources of energy, including natural gas and nuclear power, as well as unconventional sources of energy such as wind, solar and more recently, development of hydrogen as a source of energy.
With the current level of consumption we are almost certain to get in a situation where we would be required to import 90% of our total oil consumption. Therefore we need to give due cognizance to the fact that dynamics regarding oil consumption and production will keep changing. Hence it is in our best interest to preemptively embark on a revolutionary change that will make us much more self reliant in energy consumption otherwise the ramifications of a growing dependence on a diminishing resource seem imminent.
The last four decades have seen a series of oil shocks, yet since the Indian economy has been in different stages of development the impact of the shocks have been varied. India came face to face with the first oil shock in 1973. This was the year in which Arab countries realized the power they wielded through OPEC. The outbreak of Yom Kippur war and nationalization of oil companies by Iraq led the oil prices to increase manifold. The domestic economy being a net importer of crude oil came under severe pressure. According to the statistic from Centre for Monitoring Indian Economy (CMIE), 1973 became the first year after independence when not only industrial production declined but the spiraling inflation also threatened to mar the consistent growth rate of yesteryears. Fortunately for India a severe decline in demand forced the OPEC nations to take measures for lowering the oil prices.
A few years later the outbreak of Iran war caused another steep rise in oil prices. But 1980’s witnessed a much higher rate of investment and consequently the decade saw the Indian economy growing at an annual rate of 5.5%. Unfortunately during the late 1980s India relied increasingly on foreign borrowings. Hence when the Gulf war caused another oil shock India had already got into the balance of payments crisis. To come out of the crisis the government had no option other than take measures of economic liberalization. According to Anushree Sinha, Senior Fellow at NCAER “ The subsequent policy changes did lead to a temporary decline in the GDP growth rate and increased inflation rate but in a long run the opening up of the economy has resulted in India emerge as a global player and play a prominent role in the development of the world economy.”
Here again in 2008 we are witnessing another oil price upsurge due to myriad reasons: geopolitical affairs concerning Iran and other oil producing countries, financial speculation, continuous weakening of dollar, just to name a few. The cascading effect of such a rise has already started to impact the macroeconomic statistics. The inflation figures have already crossed the double figure mark. “The slowing of IIP growth from 6% last year to 3.8% in the current fiscal is surprising and of course, worrisome “said a visibly flummoxed senior economic advisor to the government. Fortunately for us the kharif crops harvest is expected to be good but then a steady rise in oil price will push the transportation cost higher and any hopes of cooling down of primary articles’ prices may just disappear.
Hence even though the adverse effects of a steep oil price rise have reduced, we continue to have a high level of dependence on oil and thus it still continues to play havoc in overall growth story. This however does not undermine the strength of Indian economy. According to an analysis published by Energy Information Administration (EIA), the world oil consumption in the last three decades has undergone a definitive shift which substantiates the above argument. While in the 70’s and 80’s US and Europe had an ever-increasing rate of oil consumption, the last two decades have witnessed the two Asian giants India and China take prominence. Further with recession looming large over US economy the OPEC countries, as in the past, would not like to see oil demand going down due to higher prices. Therefore the analysts argue that a long period of spiraling oil prices may not be here to stay.
But countering a high level of oil dependency with sheer economic prominence can prove to be disastrous in the long run. India, which is projected to become the seventh largest consumer of energy within a decade, has to tread path cautiously in the coming years. There are lessons to be learnt from other countries’ experiences. The 1970’s showed how demand and supply, inelastic in the short run, eventually give rise to conservation and new production. The figures indicate that the OECD countries now consume less than one third of total oil consumption down from two third in early 1970’s. This is partly due to the strict conservation policies followed by the governments of the industrialized countries as well as the conscious research and development of alternative sources of energy, including natural gas and nuclear power, as well as unconventional sources of energy such as wind, solar and more recently, development of hydrogen as a source of energy.
With the current level of consumption we are almost certain to get in a situation where we would be required to import 90% of our total oil consumption. Therefore we need to give due cognizance to the fact that dynamics regarding oil consumption and production will keep changing. Hence it is in our best interest to preemptively embark on a revolutionary change that will make us much more self reliant in energy consumption otherwise the ramifications of a growing dependence on a diminishing resource seem imminent.
No comments:
Post a Comment