The Hindu Business Line : Oil anxiety

THE RISE AND fall of crude prices — from over $37 a barrel to below the $32 — over the past month has lowered the anxiety levels of oil-importing countries that were worried about the impact on their economies. Prices rose as OPEC, which controls nearly one-third of the world's oil supplies, mandated a production cut of one million barrels a day from April 1 even as the oil cartel reassured the international community that it would do nothing to destabilise supplies because of the impact on economic growth.

There may be more good news as, according to oil-market watchers, prices could decline further mainly because of the favourable developments in the US market, especially the motor spirit (gasoline) sector which, though not a major volume play, has a psychological impact on price movements. Recent US Government data show that commercial crude stocks have risen from very low levels to their 19-month high and motor spirit inventory is at its year-high. The US Government is also said to be considering temporarily relaxing the rules governing the production of cleaner motor spirit, which means refineries that had cut down on this fuel can resume supplies. Indeed, one view is that high motor spirit prices in the US is more because of refineries not being able to produce enough than due to crude shortage. The other factors which could dampen crude prices in the months ahead are the onset of summer in the northern hemisphere that would lower the demand for heating oil, and the expected tapering off of the sharp increase in demand from China. However, the International Energy Agency sees few signs of the Chinese economy slowing and says "... oil product supply can hardly keep up with demand"; China could continue to remain a major driving influence in a tight world oil market.

For India, the oil impact has been varied. The most important, and obvious, consequence has been the rise in the oil import bill, which is expected to jump 16 per cent in 2003-04. In the 11 months till February, the country imported 82.29 million tonnes of crude at $16.39 billion, compared to 74.94 million tonnes and $14.28 billion, respectively, in the corresponding previous period. The flip side of this is that given the impressive domestic refining capacity vis-à-vis internal requirements, the country has turned a net exporter of petroleum products in a buoyant international market. In 2002-03, 3.6 million tonnes of products worth Rs 2,662 crore were exported. While the refining margins have increased substantially (mainly from exports), the picture for the public sector oil companies has been dismal. Despite the deregulation of the oil industry, petrol and diesel prices have been kept unchanged artificially since January resulting in losses running into thousands of crores of rupees (an estimated Rs 2,000 crore in March alone) because of the rising world crude price. Needed is a quick and significant breakthrough in domestic crude production — static at 33 million tonnes since 1990-91 — if imports, which have risen from 57.8 million tonnes in 1999-2000 to 82 million tonnes (provisional) in 2002-03, are not to become overwhelming.