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Discussion on impact of rising oil prices
on the poor, held on August 17, 2006
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Mr P R Das Gupta initiated the discussion by welcoming the participants.
Ms Rekha Krishnan, TERI made a presentation an ongoing policy
study by TERI (The Energy and Resources Institute) titled “Impact
of Rising Oil Prices on the Poor and Implications for Achievement
on the Millennium Development Goals (MDGs)”. This was
followed by comments from the two panellists: Prof S L Rao and
Prof Vinod Vyasulu and a lively discussion by others who attended
the session.
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:
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Persistent but relatively gradual compared
to previous hikes (monthly average hike less than 20%
vs 50% in 1990 and even higher in 1970s) |
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Lower level in real terms than prices observed
in earlier episodes (early 1980s real price equivalent
to over 90$/bl) |
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Competition preventing producers unable
to pass on higher input and fuel costs to consumers |
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Price rise in some sense “expected”
given the very low levels of average oil prices prevalent
in the 1990s |
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Overall macroeconomic growth and stability
in many countries in the region notably China and India |
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Comments from the panellists and participants:
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. |
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