Column

It took five years and a comfortable election victory for the Congress-led UPA to do the half-right thing in the oil sector. The hike in petrol and diesel prices announced last Wednesday is an absolute must, and should not be rolled back when the political pressures start to build. But it’s simply not enough to be called a reform.

The decision is half-right because it is neither here not there. Raising prices as a one-off thing is like dealing with the symptoms; it comes nowhere near addressing the two underlying problems of India’s oil economy. One is the huge damage low prices are doing to our oil companies, which bear the brunt of the subsidies. The other is the even bigger damage it is doing to the country’s energy security and the environment.

The first point needs no elaboration; the second one needs re-emphasis, if not elaboration.

Cheap oil has become the world’s big drug fix. We love it because it reduces our fuel bills. It encourages us to waste precious energy, especially energy coming from fossil fuels. The more we love driving cheap, the more we are damaging our environment and our future. It may make sense to protect the poor from having to pay higher prices for kerosene and cooking gas, but even here we need a policy on who will pay for the subsidies.

When we keep fuel prices cheap, we are essentially transferring political power to the oil producers, the vast majority of them being unpopular authoritarian or theocratic regimes. Oil wealth and authoritarianism are inter-linked, as columnist Tom Friedman so conclusively proves in his latest book, Hot, Flatand Crowded.

Authoritarian regimes maintain their hold on power by buying off political dissenters with subsidies financed from oil wealth. Put another way, the world’s dependence on oil is funding intolerant or heavy-handed regimes from Saudi Arabia to Sudan to even Russia.

I would, therefore, advocate an aggressive oil pricing policy that perpetually keeps oil prices high in India no matter what the international prices of oil are. The only exception is that the poor should be protected, and gradually coaxed to pay more for their fuel when their incomes start rising.

This policy means that when global prices are low, we should proportionately increase our taxes to maintain high pump prices. When global prices rise, we should moderate our taxes, but by lesser amounts than the quantum of the oil price increase. One implication of this policy change would be that we will have fossil fuel costs, and higher short-term inflation. But that is a small price to pay for the larger national good.

The big positive spinoffs from higher priced oil are that it will force us to save energy. That, in itself, will be good for India. Next, it will encourage companies to invest in alternate sources of energy. The reason why oil prices suddenly shot through the roof in 2007-08 is that we failed to encourage alternative sources of energy when prices were low. A decade or more of cheap oil made us, and especially the US, complacent on the energy scenario.

Big investments in solar, fuel-cell and other forms of alternative energy sources became unviable. Little wonder, when the global economy, led by India and China, boomed in the first decade of this century, oil prices went through the roof.

It is, of course, possible to argue that high oil prices will, in fact, benefit the same authoritarian regimes that put down their own people. They can now subsidise their people even more, and suppress political activity. This is certainly true for the short term. But look a bit closer and the reality will look different. When oil prices are kept high as a matter of policy, oil producers will start earning more.

But in the oil-consuming countries, people and corporations will start saving oil and investing in alternative technologies. When this process continues for a decade or more, the result is almost always lower dependence on depleting fossil fuels. Over the long-term, thus, power will shift back from oil producers and Opec to consumers.

A shift from fossil fuels to alternative sources means a giant shift away from natural resources to perennial sources. It lowers the bargaining powers of those who were merely fortunate enough to be sitting on the right geographical areas to those who use their intellect to generate energy from knowledge and technology. It is fundamentally democratising.

Speaking specifically about India, where taxes on oil are anyway not low, we should continue with this policy and make sure that taxes increase when prices are down and fall only marginally when global prices are high. As for subsidies, the centre should budget for them and ensure that only the poor benefit.