Outline of the study on impact of rising oil prices on the poor

In her presentation, Ms. Rekha Krishnan highlighted the rise in world crude oil prices since late 2002, and attempted an assessment of impacts of this price rise on the poor in developing countries in the Asia Pacific region. The recent price rise is an outcome of a combination of factors rooted in the demand and supply side as well as in rising costs and perceived fears of supply disruptions. Overall, the macro level impacts of the price rise at the global and regional levels have not been significant thus far particularly in terms of impacts on GDP and inflation. Nevertheless, some recessionary and inflationary impacts are imminent based on the observations for recent quarters. At the national level – the study conducted by a group led by Ms. Rekha Krishnan covers four countries: China, India, Lao PDR and Indonesia. The macroeconomic impacts in these countries are similar to the regional impacts. The study also included field-based assessments covering small samples of about 100 rural and urban households in each country. These field studies point to important observed and potential impacts of rise in domestic prices of household and transportation fuels (kerosene, LPG, petrol and diesel) on poor households. These impacts have been observed in terms of households reverting from kerosene and LPG (more significantly kerosene than LPG) to traditional biomass fuels in both rural and urban areas and higher transportation costs which have implications for access to healthcare centres, schools, market and the workplace. Cases of reversal to non-motorised forms of transport are also seen (switch to walking for example in lieu of two wheelers and public transport). Prices of agricultural inputs such as fertilisers have not affected farm income to the extent that these inputs are subsidised. These findings are to be viewed in the context of limited pass through of rise in oil prices from the international to the domestic prices due to subsidised/ regulated pricing not only for petroleum products but also for services such as transport and products such as fertilisers that are oil-intensive. Governments in these countries are burdened not only with the fiscal implications of subsidies but also the pressure on foreign exchange reserves imposed by rising oil import bills.

Overall, impacts of rising international oil price on poor households and on the macroeconomies is a function of various factors, importantly the oil intensity and the dependence on imported oil / products. Factors such as subsidies (which prevent pass through of the price rise to consumers), monetary instruments (which help rein in potential inflationary effects) and overall macroeconomic growth and stability (reflected in GDP, GDP growth, foreign exchange inflows) help moderate the adverse impacts of international oil price rise on households and governments in the short term. Other factors to be noted when considering the somewhat “muted” impacts of the current oil price rise especially in comparison to the earlier prices rises include:

Prof Rao commented that oil price shocks are not new and economies have adjustment mechanisms which enable them to move to new equilibria when oil prices rise. These mechanisms which are a function of holding capacity give the economies time to adjust to new higher oil prices. What we do with this time is important. India has been remiss in taking action in improving energy efficiency and in the development of alternative sources of energy. There are also large issues with pricing of alternative energy sources including electricity and gas. Protection for the poor is a requirement, but our political system does not permit proper targeting of subsidies, which if managed well need not be fiscally unsustainable. The problem of subsidised kerosene being used for adulteration of diesel is fairly complex to handle. It may also be noted that Asia has benefited from the “oil money” coming in from oil exporting countries which has been spent in the region spurring growth here.

Prof Vyasulu pointed out that the we need to explore in more detail the relevance of oil prices to the economy and to households. He also pointed out very interestingly if the study was as much about the impacts of rising oil prices as about the domestic petroleum product prices not rising as fast as the international prices. Expressing concern over India’s focus on personalised transport, he pointed out examples such as Singapore of consciously moving towards mass transport systems. Pointing out that the relatively small price changes had not changed behaviour, he mentioned that perhaps a large increase through a large cess as imposed in Singapore may prompt some behavioural changes towards reducing oil consumption.

Mr Gururaja opined that availability is more important than pricing in determining the energy consumption patterns of households indicating that if a fuel is preferred and is available, households are unlikely to revert to inferior or less preferred fuels merely on grounds of higher prices. He remarked that there is a need to sharpen further the policy recommendations to focus on the oil sector, emphasising the need for integration of the different components of the energy sector.

Responding to a comment from one of the participants about poor households being faced with income insecurity on account of being dependent on daily wages, Prof Rao added another factor that may be making these households more vulnerable to prices rises. As shown in a study, poor households – on account of their spending in small amounts – often end up paying a higher price for various commodities that they consume. Prof Kirk Smith pointed out that if this study shows high price responsiveness among poor households, this finding must be reconciled with price elasticity estimates from other studies. A participant remarked that responses to inflationary effects are also influenced by whether the price increases are gradual or sudden.

Winding up the discussion, Mr Dasgupta indicated that more such interactive discussion on though-provoking issues would be organised in future by the Centre.