The Crude Oil Paradox

As far as my knowledge of economics goes, whenever prices of a commodity goes up, the demand for that commodity start falling over a period of time. But unfortunately this economic theory doesnt seem to apply for crude oil. So does that mean all of us should retake lessons in economics. Nope, not at all. If we delve deeper into this burning crude oil problem, one would come to realise that its the faulty policies of the governments across the globe that has resulted in fuelling energy prices over the years. If we take our country as a standing example, all of us have been shielded from the impact of crude oil rise from $35 to $133 per barrel over the past 4 years. Though some amount of speculative positions have definitely found their way into boosting oil prices to the present level, the story doesnt end there. If we analyse the real reasons for the oil shock, we would come to terms with the fact that demand has been rising unabated irrespective of oil price hikes, almost to the level of becoming inelastic. In India, the consumption of diesel is more than that of petrol. Most BPL category citizens and low income groups cannot afford a LPG cylinder till date. Public welfare and social responsibility does demand that the government of a country protect its citizens from the vagaries of global economic shocks.So its pretty obvious that the entire burden cannot be passed on to consumers. Therefore the government has been following the hackneyed policy of not raising fuel prices in tune with import parity pricing of crude and subsidizing the population at large only to result in literal bankruptcy of oil marketing companies.The oil bonds that the government issues as compensation to OMC's for their underrecoveries is only a strain on the fiscal deficit of this economy and is a cost on our resources as well as a burden that is passed on to our future generation. In light of this scenario why is it that petrol prices are still subsidized? Only when petrol prices are raised to reflect international realities, will demand for oil slow down. People would either stop travelling by cars or would resort to car pool system. More and more people will start using public transport systems that run on diesel/CNG. Similar is the case with LPG. Since it is consumed by the relatively creamy layer of the population, their prices should also be increased to the maximum extent possible. The luxurious will either ways continue to pay whatever is the price. So why subsidize them. The effect of these decisions would mean CNG usage would increase in a big way given the fact that its a relatively less polluting, low cost option. Public transport systems will also get efficient with more n more people commuting through it. The teething infrastructure problems can then be handled with ease.When demand for oil from a large country like India slows down, we shall see the downward spiral in oil prices happening almost as an immediate aftermath.

But given the fact that ours is a totally warped democracy with the lack of political will to take major decisions that would be beneficial to the society in the long run, these proposals are fit to lie in my closet for the time being. See you with my next article on this subject when Oil is at $ 200 per barrel.