Nepali Times
Economic Sense
Fuel for fear


Here in the United States, where the Beed is busy mixing business with pleasure this week, the average price of retail gasoline is poised to cross $3 a gallon, nearly double the bill just one year ago. The government is cautiously watching for inflation to set in while economists argue that when that is factored in, nominal prices will still be lower than in the early 1980s in real terms. The message is: price hikes happen and little can be done about it.

Soaring oil prices have become a global issue far beyond its tyre-burning-stone-pelting manifestation we see in Nepal. Neither elected nor un-elected governments like to be seen to be responsible for hiking prices as this has a cascading and direct effect on an array of consumer prices. In Indonesia, the government has lost $14 billion in the first eight months of this year subsiding prices. In India, a left-right coalition struggling to find a middle path has made oil companies suffer. China's appetite for oil is growing faster than anywhere else on earth and no statistics are available to explain how subsidies on consumer prices are financed. But price increases loom and hoarding has begun in many parts of the country. Until the early 1990s China was self-sufficient in oil but its current production is just half of consumption.

After water, oil has become perhaps the most sought after natural resource and one for which countries have gone to war. With a growing global population that increasingly requires more energy to build the infrastructure to power the automobiles, air conditioners and other amenities of modern consumer societies, there is tremendous pressure on a resource that will begin to run out in our lifetimes. Meanwhile the global oil supply is concentrated in regions whose countries are in most cases controlled by governments that closely manage their economies.

Governments have always loved to control oil as a strategic resource. Cloaking it as a resource of national importance, oil has been misused and abused by successive governments in most petroleum-rich countries for motives that defy economics. For instance, cornered by auto industry lobbyists, the US government does not encourage mass transit systems nor discourage the sale of more gas-guzzling vehicles.

imilarly in Nepal, the government still wants to be the regulator and operator of the oil business while providing lip service about opening the door to the private sector. This has led to large-scale open corruption in the distribution of adulterated fuel that has defied consumer activism to fix it. In India a plethora of government-owned oil firms continuously compete against one another and in China, the government still balks at liberalising retail prices.

So, back to this week's Beedism: Nepal can't do much with oil prices as long as we have a fixed currency regime with India. If oil prices rise in India, they will rise in Nepal. (A fall never happens in either country, as government oil companies like to pocket profits and spread employee bonuses.) The Nepal government needs to get out of this business and leave the prices to the markets, while ensuring that oil companies and dealers do not hoard and profiteer.

The global oil price hike has also again sparked discussions on alternatives, similar to talk heard in the early 1980s. Should not Nepal also embark upon such a dialogue? Let's take our focus away from hydropower for a change.

(11 JAN 2013 - 17 JAN 2013)