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Oil prices - Where's the panic?
Govindraj Ethiraj
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June 10, 2008

A few days ago I was speaking with the Jindal Steel chief, Sajjan Jindal. How were things looking, I asked. The good news was, he said, ever since the eighties, steel prices had tracked crude prices. But now, high crude prices had kicked up primary energy prices as well. And steel making involved, by definition, huge levels of energy conversion. And that was the not so good news.

What, I asked, would happen, if crude remained around $130 or went up further, interest rates remained high and so did inflation? What would happen to the many, carefully laid-out plans of industrial groups like his?

Well, he said, after some thought, "We are not looking at a Plan B as yet, if that's your question, but yes, we've begun thinking about it. And yes, if global conditions remain the same, we will have to take a re-look at our growth plans."

My conversation with Jindal as with other CEOs in recent weeks gives me the impression that India Inc is getting worried and gearing up for some very difficult times. On the one hand, there is still hope that oil prices, which are the key trigger for most of the global misery, will stabilise.

On the other hand, there is a growing and perhaps sinking feeling that things could get tougher here on. It's not panic stations as yet, as I can gather, but there is alertness to trouble, which was clearly not there in earlier months, when crude had just begun to zoom up and the bigger focus was the great financial sector meltdown on Wall Street.

Watching Prime Minister Manmohan Singh's address to the nation last week, I did not quite sense the urgency that is perhaps critical to this situation. Several economists have already argued that a severe price signal is critical to cut back consumption. They've also said that the subsidies in countries like India are fuelling higher consumption and keeping crude prices high at source.

It's not that the PM (who knows all of this) didn't say the right things; it's just that the message needed to be harder, tougher and less on the defensive. The impression I took away was that here was a government that was there for the people and it had passed on a "modest, bare minimum" price rise, in response to a global oil price shock.

Actually, he should have warned the nation that if it didn't cut back on consumption, there would be serious consequences. What came out was more a soft plea. Made worse, I thought, by the appeal to government departments and ministers to cut back on expenses and foreign trips. Sure they should. But that's not addressing the problem. Nor is it a strong or visible example to the people.

To be fair, India is not alone in its quandary. But it's the only poor country of this size that is alone in its quandary. South Korea last week announced a $10 billion spending package to help cash-strapped households and businesses.

Malaysia may follow suit. China is still holding oil prices. They can afford to, if they so wish. We can't. To put matters in perspective, China, India, Japan, Korea and the US account for half the world's energy consumption.

So, as oil economists have been arguing the world over, a full removal of subsidies is the only way consumption will fall, perhaps by 20-30 per cent, which in turn could have a calming effect on crude.

But that would mean that the situation needs to be viewed as a crisis. In India, one is not sure we are remotely there as yet. And that won't happen if the people are not told how bad the situation really is.

There is some talk that the government will launch a campaign of sorts to reach out to people. There have been sporadic messages emanating already. But that's the best it's got, so far. And crude oil prices have actually drifted up after the fuel price hikes.

The government is perhaps feeling that the people will not understand the situation. My sense is that this is where they've got it somewhat wrong. I can only say it anecdotally but the drivers in my office pool seem to understand quite well that the government should not be paying for high oil prices from "its pocket". And they've been listening to the opposition speeches as well.

The US has already begun to cut back consumption, some figures suggest an over 1 per cent fall in the last four weeks. Which is not surprising considering gasoline is now averaging $4 per gallon and more in many cases. In contrast, I really wonder whether the Rs 5 and Rs 3 hikes in petrol and diesel have worked.

They may have corrected the revenue imbalance but not the consumption imbalance. For that, we need to be heading towards panic stations. Or as Jindal told me, "We will have to start looking at a Plan B".

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