RISE IN OIL PRICES; AN ENCOUNTER

There was a time when global oil prices reflected changes in the real demand and supply of crude petroleum. The current oil price spike reflects not only current economic conditions and perceptions of future activity, but also world political situations. Crude oil price increased five-fold in five years: from $22 per barrel in 2003 to $110 per barrel in March 2008. Cost per barrel was $100-115 in April-May, 2011. A country like India that imports three-fourths of its oil cannot ignore global price trends for very long. However, repeated fire-fighting to douse the oil surge has adverse effects on people. Already burdened by inflation, hike in oil price directly or indirectly enters into all other prices, leaving a consumer unhappy.

The repercussions will be far-fetched: an increase in the price of diesel, the economy's main transportation fuel, will push up the cost of cloth and food items, including fruits and vegetables, eggs, and many other perishables that are moved largely by truck. A hike in transportation costs usually has a cascading effect on food prices already reeling under food inflation. Transported raw materials will raise input costs, thereby, production costs. Eventually, end consumer takes the blow in the form of cost push inflation.

A common man can find an increase in fares charged by public transport system in order to offset the price rise as recently was the case with APSRTC. The cement industry has a large part of its transport through roads. Cement prices will be impacted by about Rs. 3-4 per 50 kg bag and consequently a dearer infrastructure leading to hike in user fees. The recent fuel price hike has had a cascading effect on the packaged drinking water industry as well. According to manufacturers of packaged drinking water around the city of Chennai, the price has been hiked by Rs.5 per 20-litre bubble-top container by the dealers.

As per census 2001, 12,528,916 Indians use kerosene as a cooking fuel; significantly rural. As for the increase in the price of kerosene ---- the poor woman's fuel ---- there have been reports that a significant proportion of the fuel obtained from the public distribution system is being diverted for adulterating diesel and other more expensive fuels. Clearly, an access made difficult. Even cooking gas users ---- primarily of middle class or above poverty level (APL) ---- were not allowed to save their neck. A recent increase of Rs. 50 on a LPG cylinder of 14.2 kg is deeply resented.

Now considering a petrol price rise, in India two-wheeler density is more than 75% while the passenger vehicle is only 15%. Petrol is the only fuel for two-wheelers. Hence, proportion of two-wheeler users affected by petrol price rise is several times more than car and big car users.

Such cost pressures have another consequence: they push governments to inflation control measures, such as higher interest rates. In many countries this worsens the chances for the already fragile economic recovery after the crisis. So people across the world face lower real incomes and may face reduced employment opportunities.

From the above it is clear that we encounter the percolation effect of oil surge into every possible sector. Oilonomics has gone haywire. Strong oil reforms, especially in pricing, subsidies and retailing in place could unleash the burden of consumer.

Kiranmayee Manikyam