Benefits of high oil prices

Do high oil prices benefit only oil producers? Or can we, if we look hard enough, find some benefits to consumers also? The year 2000 began well for the producers; the WTI (West Texas Intermediate), the US marker crude oil, crossed $30/barrel in February and Brent followed suit in April. The Dubai crude, which determines the price of Indian crude, is now selling at $22/barrel. Once again, the oil pool deficit is mounting. The prices of LPG and kerosene have been raised. Is there a silver lining to this dark cloud? There is one obvious and direct benefit. With annual imports of 60 million tonnes and an import duty of 15 per cent, a rise in the price from $18/barrel to $25/barrel means an additional revenue of Rs 18 billion. The trouble is that inflation may reduce growth and cause a loss of revenue elsewhere. Oil production in India has stagnated around 30 million tonnes a year against the present requirement of 90 million tonnes. The requirement goes up by 5-7 per cent every year but known oil reserves cannot give us a much higher production. Accordingly, enhanced exploration of our sedimentary basins has been a priority for us. Last year, the government launched the NELP (New Exploration Licensing Policy) to create a level playing field for the private sector in oil exploration. Unfortunately for the launch, the prevailing oil price was only around $13/barrel. The industry gave a muted response. Perhaps, it would be possible to go for another round of bidding this year while the price is high. The cost of oil production varies from one region of the world to another. The least-cost oil fields are mostly in the Middle East. The first oil shock of 1973, which raised oil prices beyond $10/barrel, encouraged production in areas such as the North Sea. Up to a point, higher prices are required to sustain production in diverse regions and thus ensure security of supplies. To that extent, the consumer may willingly pay a `security premium? to reduce vulnerability to supply disruptions due to local or political problems. This is why, more than once, USA has prevented the collapse of global oil prices. High oil prices can encourage efficiency in oil use. Immediately after the first oil shock, USA adopted the target of doubling the fuel efficiency of automobiles and achieved it in a short time. Since then, USA has improved energy efficiency by 27 per cent. Similar, if not better, results have been obtained in Japan. Japanese factories in the steel, chemical, and cement industries have attained the highest levels of energy efficiency in the world. Track record of the developing countries has been poor in this area. According to estimates, India could easily reduce energy consumption by 25 per cent in the industrial sector. However, there are formidable institutional problems in realising these gains. Oil price shocks have also stimulated the search for alternatives. The greatest gainer has been natural gas. This has the advantage of being a much cleaner fuel. Clean coal technologies and derivation of petroleum products from coal got a boost in India and the rest of the world following the first price shock. Today, the world is at the threshold of alternatives like fuel cell for automobiles. While a powerful stimulus behind the development of such technologies comes from the awareness of the need to reduce emission of greenhouse gases, it is doubtful if the pressure could be kept up without the aid of high petrol prices. Therefore, would the present high price mean more oil exploration, diversification of our oil import sources, and more R&D of energy efficiency and renewables? In short, would it do all that the first oil shock did? Paradoxically, the oil price can help only if it stays high long enough. Otherwise, we simply pay more without getting any long-term benefit in return.