The govt deregulates oil prices – and takes the most dangerous step in our economic history to become a disaster prone ‘oil-shock’ economy
Since when did deregulating oil prices become a sensible step towards boosting economic growth? Did we miss some lectures during graduation or were we altogether in the wrong Sheldonian Theatre course? Don’t get us pseudo Galbraithians wrong – we’re not against any oil price hike; in fact, we rabidly support it. But to undertake a flabbergasting decision to blindly deregulate oil prices – in order to allow it to fluctuate according to global oil movement vagaries – is the most dangerous step ever in India’s economic history. The act by India’s Empowered Group of Ministers (eGoM) of the United Progressive Alliance (UPA) to initiate the deregulation process of petroleum products a month back, fails to recognise that all global recessions in recent history have had a common cause for occurrence: energy price rice. Or are the memories of the 2007-08 economic recession already forgotten unbelievably?
Post the eGoM moves, petrol prices have already gone up by Rs.3.50 per litre. Though diesel price deregulation is on hold for now, prices have still been raised by Rs.2 per litre. Similarly, the price of the domestic Liquefied Petroleum Gas (LPG) has also been further hiked by Rs.35 for every 14.2 kg cylinder. Kerosene has got dearer by Rs.3 per litre to cut the government’s fuel subsidy, which stands at around $25.6 billion.
One does honestly appreciate the fact that India’s Finance Minister Pranab Mukherjee is quite serious at reducing the fiscal deficit burden – something he had mentioned in his budget speech with sincerity. To that effect, a calibrated price hike is completely logical, but a sudden deregulation is frighteningly irrational and a spectacularly risky affair. James D. Hamilton, Professor of Economics, University of California presented a benchmark paper drawing a correlation between oil price hikes and subsequent recessions. The recession that America witnessed during 1973-74 was preceded by the 1973 oil crisis when the members of Organisation of Arab Petroleum Exporting Countries or the OAPEC (consisting of the Arab members and Egypt, Syria and Tunisia) called for an oil embargo against US decision to re-supply weapons to the “Israeli military” during the Yom Kippur war. OAPEC decided to increase oil price by 70% to $5.11. Moreover, due to unforeseeable threat with regard to oil import, oil price went up from a mere $3 to a whopping $12 per barrel. The second oil crisis US went through in 1978 was due to the Iranian revolution which disrupted the oil production and supply from Iran. During this period, oil price soared from $15.85 per barrel to the historic high of $39.50 per barrel. This was followed by the Iraq-Iran war that had a huge impact on the severe recession during the 1980s. The relevance of the irrational price rise to the tune of $147 per barrel prior to the recent downturn cannot be given up either. Even the Dubai crash last year was due to the sudden oil price fluctuations. Rises in oil prices fuelled the real estate bubble and the subsequent fall almost brought the economy on its knees.
Since when did deregulating oil prices become a sensible step towards boosting economic growth? Did we miss some lectures during graduation or were we altogether in the wrong Sheldonian Theatre course? Don’t get us pseudo Galbraithians wrong – we’re not against any oil price hike; in fact, we rabidly support it. But to undertake a flabbergasting decision to blindly deregulate oil prices – in order to allow it to fluctuate according to global oil movement vagaries – is the most dangerous step ever in India’s economic history. The act by India’s Empowered Group of Ministers (eGoM) of the United Progressive Alliance (UPA) to initiate the deregulation process of petroleum products a month back, fails to recognise that all global recessions in recent history have had a common cause for occurrence: energy price rice. Or are the memories of the 2007-08 economic recession already forgotten unbelievably?
Post the eGoM moves, petrol prices have already gone up by Rs.3.50 per litre. Though diesel price deregulation is on hold for now, prices have still been raised by Rs.2 per litre. Similarly, the price of the domestic Liquefied Petroleum Gas (LPG) has also been further hiked by Rs.35 for every 14.2 kg cylinder. Kerosene has got dearer by Rs.3 per litre to cut the government’s fuel subsidy, which stands at around $25.6 billion.
One does honestly appreciate the fact that India’s Finance Minister Pranab Mukherjee is quite serious at reducing the fiscal deficit burden – something he had mentioned in his budget speech with sincerity. To that effect, a calibrated price hike is completely logical, but a sudden deregulation is frighteningly irrational and a spectacularly risky affair. James D. Hamilton, Professor of Economics, University of California presented a benchmark paper drawing a correlation between oil price hikes and subsequent recessions. The recession that America witnessed during 1973-74 was preceded by the 1973 oil crisis when the members of Organisation of Arab Petroleum Exporting Countries or the OAPEC (consisting of the Arab members and Egypt, Syria and Tunisia) called for an oil embargo against US decision to re-supply weapons to the “Israeli military” during the Yom Kippur war. OAPEC decided to increase oil price by 70% to $5.11. Moreover, due to unforeseeable threat with regard to oil import, oil price went up from a mere $3 to a whopping $12 per barrel. The second oil crisis US went through in 1978 was due to the Iranian revolution which disrupted the oil production and supply from Iran. During this period, oil price soared from $15.85 per barrel to the historic high of $39.50 per barrel. This was followed by the Iraq-Iran war that had a huge impact on the severe recession during the 1980s. The relevance of the irrational price rise to the tune of $147 per barrel prior to the recent downturn cannot be given up either. Even the Dubai crash last year was due to the sudden oil price fluctuations. Rises in oil prices fuelled the real estate bubble and the subsequent fall almost brought the economy on its knees.
Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
For More IIPM Info, Visit below mentioned IIPM articles.
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An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
For More IIPM Info, Visit below mentioned IIPM articles.
Zee Business Best B-School Survey 2012
Prof. Arindam Chaudhuri's Session at IMA Indore
IIPM IN FINANCIAL TIMES, UK. FEATURE OF THE WEEK
IIPM strong hold on Placement : 10000 Students Placed in last 5 year
IIPM's Management Consulting Arm-Planman Consulting
Professor Arindam Chaudhuri - A Man For The Society....
IIPM: Indian Institute of Planning and Management
IIPM makes business education truly global
Management Guru Arindam Chaudhuri
Rajita Chaudhuri-The New Age Woman
IIPM B-School Facebook Page
IIPM Global Exposure
IIPM Best B School India
IIPM B-School Detail
IIPM Links
