The global oil crisis is now going to affect India’s domestic budgets. Governments around the world are already implementing some form of energy discipline. Sri Lanka has implemented a policy of four-day work-week and fuel passes. Bangladesh has started rationing fuel. The Philippines has declared an energy emergency. South Korea has imposed a fuel price cap for the first time in three decades. Japan releases record strategic reserves. European countries are warning citizens to save energy as petrol prices cross Rs 200 in many markets. per liter has reached above. The era of cheap energy is over, at least for now. The reason lies thousands of kilometers away in the Strait of Hormuz. This narrow waterway is responsible for about 20% of the world’s oil supply. The Iran war has turned this important route into an area of uncertainty. Oil tankers are being rerouted, shipping insurance costs have exploded, freight costs have soared and supply chains have been disrupted. India is among the most affected economies of the world. About 50% of our crude oil and 90% of our cooking gas imports come from Hormuz. In simple words, when there is a fire in West Asia, India has to bear the brunt. So far, Indian consumers have been spared the worst effects of this crisis. Despite the sharp rise in global crude oil prices, petrol and diesel prices have remained largely stable. There has been neither rationing nor long queues outside petrol pumps. But this also had to be paid at a price. The government cut excise duty. Public sector oil companies bore the burden of huge under-recovery. Refineries were forced to operate at unusually high capacity. In a sense the state itself absorbed a part of the shock that the market would otherwise have passed on directly to consumers. Critics say the move was driven by political reasons, that fuel prices were kept artificially depressed until the elections were over, and now consumers are being prepared for a price hike. But this argument ignores the broader reality that every oil-importing economy faces. The dilemma faced by governments around the world was whether to immediately pass the shock on to consumers and trigger inflation, or to bear it temporarily. Most governments chose the path of intervention in some form or the other. India also did the same. Because fuel prices are not isolated figures written at the petrol pump, their impact spreads throughout the economy – higher diesel prices increase transportation costs, increase food prices, make manufacturing more expensive, increase the cost of air travel, and inflation has a wide-ranging impact. Even if the war ends tomorrow, prices will not suddenly return to normal. Tankers take weeks to arrive, insurance rates remain high long after a ceasefire is declared, countries take time to replenish depleted reserves, traders remain cautious, and supply chains are slow to return to normal. You pay the price for it either directly in the form of higher fuel prices, or indirectly through taxes, inflation, fiscal pressures and reduced spending in other sectors of the government. There is no way to avoid this. (These are the author’s own views)
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Palki Sharma’s column: The era of cheap energy is over for now
