Global oil prices around $80 have already put India’s macroeconomic and import watchers on red alert. This won’t be the first battle fought. India had to go through this last year, when crude oil spiked to $147. Matters calmed when the world economy slipped into recession, sharply lowering oil demand— and, hence, the price. Now, prices are marching upwards again, prompting questions about oil’s future outlook.

The world scene, reflected by the International Energy Agency (IEA)’s World Economic Outlook 2009 released on Tuesday, makes for one battle front. IEA predicts global oil demand to rise from the 85 million barrels per day (bpd) that it is now to 105 million bpd by 2030—supply more or less matching. India and China will consume more, but West Asia will also produce more. Not too bad, right? However, the Guardian reported this week that, according to an IEA whistle-blower, these figures are distorted. Apparently, owing to US pressure, the agency has made rosy estimates—presumably to downplay concerns that oil has already hit its production “peak".

Illustration: Jayachandran / Mint

We don’t know if this is true; but “peak oil" concerns, existing since the first oil shock in the 1970s, have now strengthened. The theory, best expressed by US scientist M. King Hubbert, suggests that oil production resembles a bell curve, which will have to reduce after hitting a peak. After a point, it will take a barrel of oil worth energy just to drill for one, nullifying net gain. And even if companies wanted to invest in technology to ease production, the downturn has dampened chances—as IEA notes.

That leaves India staring at $80 oil, a front that may well be advancing over time.

But there’s a second front. Made up of the government’s regime of tightly regulating oil prices, this one behaves more like a fifth column.

Considering India imports at least 70% of its oil, oil companies bleed red when global prices increase—but the government refuses to alter local ones. To finance under-recoveries, worth at least Rs103,908 crore in 2008-09, the government last year had to resort to off-balance sheet bonds.

The longer this continues, the more the fiscal deficit widens. And the longer it takes for deregulation, the longer the market is denied price signals—depriving domestic oil firms the chance to channel investment, and also possibly skewing consumption.

India may or may not win against the first front. But unless it does something against the second front, it will lose the war for fiscal sanity and energy stability.

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