Comments on: Solving Scarcity

By: amitabh

amitabh — Fri, 21 Oct 2005 01:50:24 +0000

Well, even the US govt. is involved in the oil market through the SPR (strategic petroleum reserve). The reason is that market prices can often drift away from ‘fundamentals’ due to speculation, which can have adverse effects on output(think of the misallocation of capital due to the internet bubble). In the case of widely consumed commodities, it *does* make sense for some limited govt. invoelvement - if only to deter destabilizing speculation.

By: Pranay Manocha

Pranay Manocha — Mon, 10 Oct 2005 09:56:56 +0000

Excellent example of supply being met adequately by market forces. Unfortunately, there is a lot more socialist guidance on policies than there is market-driven. What you say is the only solution and I fully support it. However, from what I understand (I may be wrong!) Oil is not governed by WTO rules, but rather by OPEC guidelines and by specific country policies. So unless the global hydrocarbon economy adopts free market principles - by not artifically suppressing the oil prices by producing more oil, or by setting american and european acceptable standards, I see no point for India to move forward to a market driven oil sector. A market driven oil sector is good for an economy where the wealth differential is not great, in India, it is enormous.

But the logic that Oil prices will go up as a result of free marketization results in an absurd interpretation by most makers of policy (and even in the comments that people have posted here!) - yes, prices will go up - but would you rather buy petrol at Rs. 60 a litre or have your taxes go to subsidise the cost of petrol to other people? The fiscal efficiency created by removing oil subsidies in India will have a lot more direct effect on everyone than the higher oil prices will.

I wait for the day when Socialism will be an outcasted idea…
Ah well!

By: kuffir

kuffir — Mon, 10 Oct 2005 05:51:01 +0000

patel says market forces would drive petroleum prices upward..aren’t we already paying higher prices ? our oil companies can’t negotiate a lower price for crude, they can’t distribute their products efficiently and they can’t control the growth of a black market put together by their own handpicked dealers. the markets can’t drag us down lower than that.

By: Patel

Patel — Mon, 10 Oct 2005 04:34:09 +0000

I am usually pro reform and not a big fan of subsidies and government control in prices, however I believe that in this case it may be warranted. Market forces would naturally drive petroleum prices upward. This would have a tremendous impact on industrial production, inflation, and consumption in India. This is at a time when we are trying to compete with China for entry into global markets as cheap alternatives to products from developed countries. Like India, China also controls the price of oil to keep it artificially low. And unlike China, Indian corporations have the added misfortune of dealing with rigid labor laws and poor infrastructure. So long as china continues to subsidize oil we can’t afford not too. Until the industrial sector in India reaches a certain critical mass and maturity, I believe that subsidizing fuel makes as much sense as spending on education and healthcare.

You are right though in the sense that it will make the oil industry in India more efficient and will result in greater foriegn and domestic investment. But I think the initial impact, and years necessary for investments and increased efficiency to yield results are not worth the benefit of one industry performing at its best.

What should be done is that policies are created that ensure maximum utilization of the subsidy provided by the government (unlike electricity). An example would be heavy taxation of fuel inefficient cars.