Libya stokes crude oil price concerns

Crude oil prices could continue their unpredictable trend if the tension in Libya continues through the week and sparks unrest across West Asia.

Brent crude is already inching towards $117 a barrel and that could be a cause for concern to countries like India.

If the tension spreads, there are concerns within the oil industry that there could be a sudden spurt to even $130/bbl. In this case, the Centre will have no option but to go in for a fuel price increase.

The silver lining in the cloud is that this is an aberration and once the air strikes in Libya come to a close, crude will settle to a more realistic $90-95/bbl through 2011-12. In fact, even the most ardent optimist did not expect prices to crash to $40/bbl in the latter part of 2008-09 after touching a peak of $147/bbl.

It is precisely this unpredictability that the Finance Minister would have taken into account when he pegged the oil subsidy projections for 2011-12 at Rs 23,640 crore. Present trends could indicate that the actual figure could be even higher if there are no fuel price increases but it is very likely that, like 2008-09, crude may just see a free fall (albeit briefly) once the crisis in West Asia comes to a close.

From India's point of view, that will be the best thing to happen if growth has to be sustained at nine per cent annually.

A fuel price hike is inevitable if things go out of control but the biggest worry is diesel where losses are increasing alarmingly as consumption continues unabated. There is only a limit to which a price hike (in diesel) can be contemplated given its potential to ‘light the inflation fuse'.

Mr Mukesh Ambani, Chairman of Reliance Industries, has already gone on record to say that it is only a matter of time before crude prices stay at the $100/bbl, which means that tough decisions will have to be taken on gradual elimination of subsidies.

The other option is to go flat out and focus on alternatives such as gas but the latest dampener has been the news of RIL's lower projections for its otherwise reliable Krishna-Godavari block.

Fuel pricing will continue to be India's biggest challenge in the coming years. Expert committees, in the past, consistently advocated complete deregulation but the Centre parried each time for political reasons. It managed to weather the crisis for years because crude prices never really acquired scary dimensions till 2008-09 happened. Today, they are not likely to fall below $90/bbl, which means the time has gone for another hydrocarbon pricing review.

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