Rise in crude prices has long been serving as a handy whipping boy whenever a downslide in the economy, especially of a developing country, had to be explained (away!). To put it differently, oil prices form an inextricable part of every analysis of a nation's economy. It is invariably the elephant in the living room as far as India is concerned, since India imports three quarters of its annual oil and gas requirements, with its import bills amounting to $18 billion.

To take two latest predictions: Goldman Sachs, based on a Value-at-Risk analysis, came up on April 24 with the finding that a rise in global oil prices by $10 per barrel would reduce India's economic growth by 0.2 percentage points, and also affect the country's current account deficit.

And not to be outdone, Deloitte, on May 30, gave the warning that spiralling oil prices and higher inflation could hurt the growth of the Indian economy, and that the country “will experience the effects of an oil-price shock… rising crude prices and a more generalised inflation threaten to derail the government's plan of achieving approximately 9 per cent growth in the next fiscal”.

This must, however, be juxtaposed with the statement of the Vice-Chairman and MD of M&M, Mr Anand Mahindra, on August 12, that the downturn in the global economy would soften commodity prices and lead to a decline in oil prices, which would buoy up the Indian economy.

Up or down, there is this compulsive tendency to establish a correlation between oil prices and a country's economy. In this background, I found it reassuring to come across opinions from two unrelated quarters questioning the connection.

CONFIDENT ASSERTION

There is first the confident assertion of the Chairman and Managing Director of Indian Oil Corporation (IOC), Mr R. S. Butola, that the impact of higher crude prices need not always be severe, and can, in fact, be circumvented by means of some ingenious countervailing measures.

The IOC seems to have achieved this by carrying out crash modernisation and upgradation of plants and shifting the dominant part of its business plan to petrochemicals.

For instance, by using modern processes, IOC has been able to convert many black products into high-value fuel such as LPG and petrol, significantly raising the company's distillate yield from 71.5 per cent in 2004-05 to 75.4 per cent in 2010-11, and thereby extracting more high-value products from every barrel of crude.

A recent IMF working paper (No.11/194) “Oil shocks in a global perspective: Are they really that bad?” is a scholarly exposition downplaying the gloomy prognostications associated with surging oil prices. The importance of the paper is that it almost exclusively focuses on the economies of developing countries.

It goes into the relationship between oil prices and macroeconomic fundamentals, including economic output and value and volume of international trade, by drawing on the documented experience of as many as 12 oil shock episodes.

MINISCULE LOSS OF GDP

Here is a gist of its surprising conclusions: There are positive effects of oil prices increasing as a result of growing demand, and it is only spikes in oil prices due to reductions in supply (as it happened in the 1970s), that have adverse effects. As long as the price increases are demand-driven, the possibility of future shocks is minimised.

Periods with high oil prices have generally coincided with good times for the global economy. Indeed, they have led to value and volume increases in both imports and exports.

Actually, a 25 per cent increase in oil prices causes a loss of real GDP in oil-importing countries of less than half of one per cent, and that too, spread across 2–3 years.

The paper also sees merit in countries adopting an overall economic strategy to reduce dependence on oil imports, since, regardless of prices being demand or supply-driven, imports entail enormous outgoes from national budgets, which could have been put to alternative and better uses.

I strongly commend the paper to the attention of both corporate magnates and policymakers alike.

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