Energy Crisis, Let Prices Adjust, Why Rationing Is Not the Answer to India’s Fuel Woes
The West Asia crisis has created a global shortage of crude oil as well as liquefied natural gas (LNG). Given India’s exposure to imported fuels, the crisis has affected it as well. In response to the shortage and the perceived uncertainty over availability, the prices of crude oil and LNG internationally have been highly volatile. The price of Brent crude has gone up from $70 per barrel on February 26 to a high of $106 per barrel. The cost of the Indian basket, however, has increased more sharply to $156 per barrel due to disruptions in supplies from West Asia. Two challenges are emerging here—a shortage of supply as well as an increase in the cost of procurement. Efforts are being made to diversify the procurement of both ingredients of our energy basket, but these are likely to augment supplies only in a few months, given the logistical challenges.
Any shortage in availability can be addressed either by allowing prices to adjust to eliminate the shortage or by rationing supply among competing users. Currently, the crisis is being managed by drawing down reserves of crude oil and by rationing liquefied petroleum gas (LPG) usage. Clearly, there are limits to managing the situation only with these tools. There are two emerging concerns with this policy response. First, perceived shortages create a black market for LPG along with hoarding behaviour. Second, the choice of rationing mechanism can have extended consequences. The government initially directed to protect consumers while partially withdrawing supplies to commercial users, including industry. Apart from the restaurants and hospitality sector, manufacturers and importers are required to set aside a portion of their stocks to meet demand. These, in turn, would cause secondary consumption effects that could reduce employment and lower production for these goods. The burden of rationing falls disproportionately on businesses, and through them, on workers and consumers.
Perhaps it is time to consider price-based mechanisms to manage demand. An increase in price in the context of this sector in India can be considered in two ways—an increase in the cost of procurement can be passed forward as a higher price, or, alternatively, an increase in price could be introduced to manage demand. Given that prices of imported fuels respond to global rather than local demand and supply, there could be a difference in the price change required in these two scenarios. In the presence of adequate supply, price management can address a number of alternative priorities. However, price plays a significantly different role of moderating demand in cases of shortage of supply. Given the current milieu, the demand-moderating impact of price increases should be the focus.
To explore this option further, an assessment of the persistence of the crisis is called for. While it is hoped that the crisis would be a short-term one with a return to “normalcy” soon, the repeated nature of dispute between Iran and the US-Israel suggests that the disruption could be long drawn or recurring in nature. In other words, uncertainty in the availability of crude or LNG, as well as its associated costs, remains. In this context, can we use this crisis as an opportunity to trigger structural change in the composition of our energy mix, with reduced reliance on imported fossil fuels? This is the critical question. The current crisis is not just a temporary disruption; it is a signal that India’s dependence on imported energy is a structural vulnerability that must be addressed.
How can the government support or nudge such a transition? The transition would have two components—first, on the supply side of energy, identifying alternative energy sources where India could have a comparative advantage; and second, on the demand side, nudging and supporting transition from one form of energy to another. On the supply side, the government has in place a number of initiatives to encourage the expansion of capacity under renewables such as solar. There are announced initiatives for coal gasification and carbon capture technologies. Ethanol can be another substitute energy source to explore. A suitable product mix which augments energy sustainability and self-sufficiency might require support not just for investment, but also for undertaking research and development for long-term efficiency in resource use. The government’s recent push for green hydrogen is another step in this direction. But these initiatives need to be scaled up and accelerated.
On the demand side, households have been encouraged to move from solid fuels such as biomass to LPG. Automobiles are being encouraged to shift from diesel to CNG, and now further to electric. Similar support would be required for industries that use LPG or other forms of crude oil derivatives to move to electricity as the primary energy source. The nudge can be sector-specific to begin with. For example, the hospitality sector, which is currently being rationed, could be offered incentives to switch to electric cooking. The transport sector could be offered incentives to accelerate the shift to electric vehicles. The industrial sector could be encouraged to invest in energy efficiency. All of this requires resource commitments from both the government and the private sector.
Consider the alternative scenarios. The current approach of rationing and price controls remains in place, or, alternatively, price is used as a tool to moderate demand. Under the first scenario, if the supply of energy is lower, it would have an adverse impact on gross domestic product (GDP) growth. With higher costs of imported fossil fuels, if the costs are not passed forward, the balance would have to be met through budgetary support. This is essentially what is happening now. The government is absorbing a portion of the price increase to protect consumers, but this comes at a cost to the fiscal deficit. The oil marketing companies are also absorbing part of the cost, which will affect their profitability and, ultimately, their ability to invest. This approach is not sustainable over the long term.
In the alternative scenario, if prices are adjusted to moderate demand, there would once again be an adverse impact on GDP growth, along with an increase in inflation. The fiscal balance might be better since revenues would be augmented both from higher petroleum taxes and implicit inflation taxes. Clearly, the cost of borrowing for governments would be higher, but the government would have a nest egg to manage the new demands placed on it. The resources so mobilised could be earmarked for supporting the transition on both the demand and supply sides as discussed above, in addition to supporting the energy requirements of low-income households. This is the key insight: price increases are not just a cost; they are also a source of revenue that can be used to fund the transition away from fossil fuels.
The choice between rationing and price adjustment is not just a technical one; it is a political one. Rationing spreads the pain of scarcity across all users, but it does so in a way that is opaque and often inequitable. Those with connections or the ability to hoard can still access fuel, while those without suffer. Price adjustment, by contrast, uses the market to allocate scarce resources. It hurts consumers in the short term, but it sends a clear signal about the true cost of energy. That signal, in turn, encourages conservation and investment in alternatives. In the long term, it is the only sustainable path.
The current crisis is a test of India’s energy policy. The government has a choice: it can continue to manage the crisis with ad hoc measures, rationing supply and absorbing costs, hoping that the conflict ends soon and that oil prices return to normal. Or it can use this moment to accelerate the structural changes that are needed to reduce India’s dependence on imported fossil fuels. The first path is easier in the short term but leaves the country vulnerable to the next crisis. The second path is harder, but it builds resilience. The choice is clear. Let prices adjust, and let the revenues fund the transition. That is the way to turn a crisis into an opportunity.
Questions and Answers
Q1: What are the two emerging concerns with the current policy response of rationing and drawing down reserves?
A1: The two concerns are:
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Perceived shortages create a black market for LPG along with hoarding behaviour.
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Rationing has extended consequences: protecting consumers while withdrawing supplies from commercial users (restaurants, manufacturers) causes secondary consumption effects that reduce employment and lower production.
Q2: What are the two ways an increase in price can be considered in the context of the energy sector?
A2: An increase in price can be considered in two ways:
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The increase in the cost of procurement can be passed forward as a higher price to consumers.
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An increase in price could be introduced to manage demand—the demand-moderating impact of price increases should be the focus during shortages.
Q3: What are the two components of the transition to reduce reliance on imported fossil fuels?
A3: The transition has two components:
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Supply side: Identifying alternative energy sources where India has a comparative advantage (solar, ethanol, coal gasification, green hydrogen) and supporting investment and R&D.
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Demand side: Nudging and supporting transition from one form of energy to another—households moving from biomass to LPG, automobiles from diesel to CNG to electric, industries moving to electricity as the primary energy source.
Q4: What are the fiscal implications of the two alternative scenarios (rationing vs. price adjustment)?
A4: Under rationing, lower energy supply would adversely impact GDP growth. If costs are not passed forward, the balance must be met through budgetary support, affecting the fiscal deficit. Under price adjustment, there would be an adverse impact on GDP growth and an increase in inflation, but fiscal balance would improve as revenues are augmented from higher petroleum taxes. These resources could be earmarked to support the energy transition and low-income households.
Q5: What is the article’s concluding argument about how to turn the crisis into an opportunity?
A5: The article argues that the government should let prices adjust rather than rely on rationing. Price increases send a clear signal about the true cost of energy, encouraging conservation and investment in alternatives. The revenues generated from higher prices can be used to fund the transition away from imported fossil fuels. This approach builds long-term resilience rather than just managing the short-term crisis.
