The Gas Chamber Verdict

If OPEC has learnt any lessons, then the last thing it should be doing is to bask in the belief that the wolf that impelled them to arrive at a smooth decision in Vienna has gone. The fact is that oil prices may not come down at all. Oil industry stocks are at a 20-year low, and since like ‘73 we’re at the onset of winter, fears of a cold season will lead to stocking of oil products and driving up prices. It will mean bad news for India and helplessness in keeping a lid on the budget deficit and a negative oil pool account. But in the US, the situation can lead to a strong response by the administration before it becomes a campaign issue. Now that Gore is leading in surveys, every attempt would be made to ensure that oil prices don’t create an impression of inaction by the administration. It’s for this reason that the President, who controls the 570-million barrels of oil constituting the country’s Strategic Petroleum Reserve (spr), is considering the release of a significant quantity for refineries.

Countries like India are partly victims of global market forces on which we have very little control. We seem to exercise even lesser control when it comes to domestic actions, in the hopeless absence of a clearly articulated energy policy. We have some lessons to learn from global responses to past energy crises and our own lack of strategic thinking. While we were siding with oil producers in mid-’70s as torchbearers of those demanding higher commodity prices, we were actually hiding our pain. Meanwhile, the developed countries put in place institutional and policy responses that yielded almost immediate results. The oecd put in place the International Energy Agency (iea) to coordinate energy policies between the rich, energy-consuming nations and their responses to any crises of the type that took place in 1973-74. Through intensive efforts by some non-government Indian institutions, the iea has given India access to this club as a non-member under a new category. But we have taken hardly any advantage of it. Could this be because the focal point in this linkage is the ministry of power and not the ministry of petroleum and natural gas?

In the ‘70s, the industrial nations broke the power of OPEC through a series of coordinated actions. Between ‘74 and ‘85, they were able to break the link between economic growth and oil consumption. Cars in the US became smaller through mandatory standards on automakers, imposed by none other than Nixon, the high priest of free market. Japan restructured its economy to reduce energy intensity over 6 years even as growth took place at an unprecedented rate. Natural gas became a major fuel in the West and Japan, with the Russian gas pipeline to Europe constructed at the peak of the Cold War in the early ‘80s. Unfortunately, the West is back to its gas-guzzling ways. After the oil price collapse in the mid-’80s, a sense of complacency has set in. Cars in North America have become bigger. Thermostats are set higher in the winter and lower in the summer. Europe, which looked down on an energy-intensive US and took pride in its high duty on oil, is busy tackling protesters in France, the UK and Belgium who are demanding a cut in those very taxes that gave them a sense of security. But the rich states will come out on top. It is nations like India that may run into rough weather.

At OPEC’s current output of 24.5 million barrels a day, a price of $30 per barrel means a revenue of under $280 billion a year. Almost two-thirds of this is the increase in annual revenues effected in the last two years. Most of this increase will go into purchases of capital goods and consumer items from the developed nations. I had carried out a study in 1979-80 on the recycling of petrodollars and came up with interesting results. The biggest beneficiaries of the increase in petrodollar flows were the rich states, including their banking system, which did roaring business at lucrative terms. Something similar is likely to happen this time too. But chances are that if higher prices continue, consumer resistance in the oecd nations will lead to a coordinated response that could send OPEC into another period of declining revenues. Greed hurt OPEC in the past and it could happen again. Both hawks and doves in this grouping have to realise the limits of their power. OPEC should hike production by at least 2 million barrels a day.

Correspondingly, myopia has hurt the consuming nations in the past and this could happen again. These nations, including India, need to get their act together and realise that oil is a scarce resource on which dependence has to be cut down if economic disruption is to be avoided. But in India this would require a purposeful, integrated energy policy to be put in place and implemented faithfully.

(The author is an energy expert and currently a Fellow at Yale University)