Released on = September 20, 2006, 9:57 pm

Press Release Author = Lalit Sethi

Industry = Government

Press Release Summary = India and the world lived in fear of a new oil shock with
crude prices threatening to rise to $100 per barrel by the end of the year. All
those fears have suddenly vanished into thin air as hotheads among the Organization
of Petroleum Exporting Countries or OPEC have brought down the temperature and are
displaying cool heads.

Press Release Body = Until a couple of weeks ago, India and the world lived in fear
of a new oil shock with crude prices threatening to rise to $100 per barrel by the
end of the year. All those fears have suddenly vanished into thin air as hotheads
among the Organization of Petroleum Exporting Countries or OPEC have brought down
the temperature and are displaying cool heads. They are not cutting the production
of 27.5 to 28 million barrels a day until the end of the year or December when
winter is approaching its mid point of the peak in the Occident. With crude prices
down to $65 or 66 a barrel in the second week of September after having touched $77
earlier this year, there is a great sense of relief among leaders of the consumer
nations.

There have been fears of a worldwide recession if the oil prices climb to unbearable
levels. Those fears have been held in abeyance for some months, if not for a long
time. There is a good breather of sorts as the OPEC realizes that a recession could
hurt them as much the rest of the world. They are now quite prepared for crude
prices to go down further and $60 per barrel is an acceptable price to them. Only if
the price goes below that level at the end of the year-and that is unlikely-will
they consider production cuts and continue to make good money. But do they really
call the shots any more with the world diversifying for supplies? They are well
aware of this scenario.

There have been continuous demands and threats of raising petrol and diesel prices
in India as the oil companies claim they are incurring heavy losses, especially by
subsidizing domestic gas and kerosene supplies to consumers whose pocket cannot be
easily picked without political repercussions at a time when five States go to the
polls early next year. But the drop in crude prices to $65 per barrel has taken the
wind out of their sails and their arguments hold no water any more. Especially it is
a relief for the Finance Minister, who has been under pressure to reduce excise duty
on domestic petroleum output and Customs duty on imported crude by one rupee per
litre. He might be considering ignoring the Petroleum Minister's demands in view of
the drop in world prices. Thus the debate between two key wings of the government
should be silent until the next flurry of high cost of energy, especially the
imported one.

India is managing its energy security rather well and there is widespread
recognition of this fact. It has been revealed that petroleum imports have dropped
by 3 per cent, saving billions of dollars. In actual terms the drop is anywhere
between 2.5 to3 million tons, considering that India uses about 110 million tons and
imports more than 70 million tons of crude every year. How has this happened? There
are a number of reasons. One is that bus services in Delhi, Ahmedabad and some other
coastal cities are run on compressed natural gas instead of diesel. The second is
blending of petrol with five per cent of alcohol in nine major sugar-producing
States. This blending is being extended countrywide from November this year. Apart
from bus services, a number of taxis, scooter rickshaws and private vehicles are
also being run on CNG, which is about one third the price of petrol and half that of
diesel.

India is now vigorously engaged in cooperation with Brazil, which is the world's
largest user of gashol at 70 per cent of it for motor vehicles. Brazil is a country
more than twice the size of India and a population much below 100 million. It has
huge sugar plantations and India proposes to buy or lease 10,000 acres to grow
captive sugarcane as a learning process to be translated and repeated in India.
India has also started growing jatropha to produce oil which can be used as a blend
for petrol and diesel.

India's own oil and gas exploration is rising slowly, but new reserves are being
found every few weeks and Indian and foreign investment in oil exploration,
discovery and exploitation is buoyant with successful rounds of new energy licensing
policy being announced more than once a year. In this scenario, India could be
expected to increase its petroleum production by about one per cent every year to
try and reduce imports by that much. Other sources, especially non conventional, and
blending of petrol and diesel and use of CNG, diminish India's dependence on
imported energy. Today India imports about 70 per cent of the crude it needs. It has
a number of overseas oil assets, which increase energy security by five to 10 per
cent per year. In 20 years India could be expected to meet 50 to 60 per cent of its
petroleum requirements from onshore and offshore sources as the demand is rising all
the time in view of rapid industrialization and enormous increase in motor vehicles
of all types, including tractors. Imported energy is a fact of life for an economy
on the bounce.

The confrontations around the world, especially between the USA and Iran on the one
hand, US and Venezuela on the other, besides demands by the hawkish Nigerian
president of the OPEC cartel to cut crude production to keep the prices high, have a
big impact on India as well as a large number of countries around the world which
have to import petroleum in a big way as their own output is far below their
requirements. The American threat of seeking United Nations sanctions on Iran might
perhaps be held in abeyance as Iran has given hints of not engaging in uranium
enrichment for at least two months. This is a key factor in the prospects of war of
words, threats and counter-threats being slowed down for some time to come if the
two sides are not playing a game of hide and seek, yet preparing for a crisis.

An unconfirmed report in early September, broadcast by a news channel, said that the
US has discovered huge new oil deposits in the Gulf of Mexico and they had increased
the American petroleum prospects or possible reserves by 50 per cent. If true, the
US could step up extraction of oil from its known reserves by 10 per cent in case of
threats of cut off of supplies by Iran and Venezuela and consequent jump in
petroleum prices worldwide. Apart from that the US now has assured supplies from
Libya, which has backed down on its anti-American rhetoric. Libya, one of the top
ten oil producers in the world, has decided to raise its crude production from 1.6
million barrels a day to 3 million barrels in three years as it is attracting
foreign investment, but it will abide by OPEC diktats.

The US and its allies also control considerable oil supplies in Iraq even if they
are not being shipped in large quantities to Europe through Turkish pipelines, but
pumping has already begun. These facts cannot be overlooked by OPEC and it is
possible that they realize that they do not have full control over petroleum prices
as they supply the world with only 40 per cent of its needs. Russia, one of the
largest oil producers in the world, is keeping the world well supplied, but
enriching itself as a result of high market prices. But Saudi Arabia, the world's
largest oil producer, is sympathetic to American and Western world's needs and is
believed to be playing a moderating role in determining production cuts and high
pricing.

The energy scenario is not too bleak at present, but caution is better than
overconfidence. It is good to be forewarned about imponderable or unexpected
developments.



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