The only cure to spiralling crude oil prices is demand management

Crude oil is now selling for almost $135 a barrel. This is three times the $45/barrel price that prevailed only about 3 years ago. Not surprisingly, inflation is on the rise. Everyone seems to be focused on asking OPEC to increase production, so that prices will come down. Personally, I think that is the wrong approach. What is OPEC’s incentive to increase production? Even at current levels of oil prices, there seems to be no dearth of buyers- including countries like India and China- and of course, the US. The OPEC countries will naturally want to make hay while the sun shines. Known oil and gas reserves may not last for more than another 75 years- and if production were to increase, even this time horizon could reduce.

What is needed is for large consumers like the US, China and India to focus urgently on policies that will curtail consumption and hence demand. With the subsidy on diesel, petrol and cooking gas, what is happening is a forced redistribution (transfer) of wealth from the public sector oil marketing companies to consumers. In other words, Peter is being robbed to pay Paul. The current subsidy is uniform, and does not discriminate between someone who earns Rs100,000 per month and someone who earns say, Rs10000 per month. Both pay the same prices for fuel; for the latter, the rising fuel price makes a much bigger dent on his/her monthly budget than for the former.  Maybe fuel should be priced based on people’s income. If income is not something that can be practically tracked for such purposes, the cars that people drive can be a good proxy. It is reasonable that someone driving a Mercedes Benz, Toyota Corolla or Hyundai Embera is wealthier than someone that drives a Maruti Alto, Tata Indica or Hyundai Santro. Similarly, let someone  riding a Hayabusa or Ducati pay more for fuel than someone riding a lower-end motorcycle/scooter. Let the price of fuel be based on what vehicle you drive- the more expensive the vehicle, the more you pay.

Another critical element of demand management for oil is the creation of quality mass transit infrastructure at adequate service levels. For instance, the new airport at Bangalore is a good 35-50 Kms from most main residential areas of Bangalore. If people use their cars to get picked up and/or dropped, their cars will consume a good amount of fuel. If, on the other hand, they use the air-conditioned Volvo buses (the Vayu Vajra service) that BMTC has introduced, significant amounts of petrol/diesel will be saved everyday. And if bus fleets in large cities are converted to CNG, that too will save money in a couple of years (of course, there is the initial investment to worry about). And a major side-benefit will be reduced emissions from buses that run on fossil fuels.

Once can only hope that in the next decade or so, alternative fuels will become more mainstream and the world as a whole will depend less on conventional petroleum-based fuels.

BJP wins Karnataka

The BJP has won 110 of the 224 seats in the Karnataka assembly polls. The Congress bettered its performance compared to last time, and the JD(S) has been all but annihilated. Fears of a hung assembly have been belied; however, although the BJP is projecting Mr B S Yeddyurappa as the next CM (and says he will be sowrn in on May 28th), the party may well need support from others since it has fallen short of absolute majority by just 3 seats.  Who will provide he support, whether the supporters wil be part of the government or will remain “outside” etc. are questions that will be answered over the next few days, as hectic parleys occur in and around Bangalore.

The BJP specifically spoke about its Bangalore agenda, and this may have had a role to play in its performance (although voter turnout in Bangalore was not very heavy). But perhaps more importantly, the BJP benefitted from the “sympathy wave” that was created last year when the JD(S) pulled the rug from under the BJP’s feet. Deve Gowda was seen as being unreasonable and petty. The results will undoubtedly dent his- and the JD(S)’ image. But whether he will learn from his mistakes is quite another question. It will be very unfortunate if the BJP has to turn to him and the JD(S) to form the government. Of course, if it can engineer a vertical split in the JD(S)- now that some stalwarts from the JD(S) have lost- then life may become easier.

But no matter who forms the government in Karnataka, I hope it is focused on the important issues around development, education, infrastructure etc.