As if it wasn't enough that policymakers had to contend with stubbornly unyielding inflation, now comes the news of a spurt in oil prices following the unrest in Libya. Prices in London of Brent North Sea touched $103 a barrel on February 22 and almost echoed the spurts during the economic boom before September 2008. The irony for the world economy is that the rise comes during a weak recovery phase while the Indian economy is at a critical stage of its movement towards the peak of 9 per cent. With policymakers grappling with supply constraints and manufacturers with rising input costs, a sustained momentum in oil price spikes could have damaging effects, given the country's dependence on imports for nearly 80 per cent of oil consumed.

Libya is the world's 18th largest oil producer and the 10th largest exporter; according to reports, the current unrest will cause a drop of anything between 20-30 per cent in supplies. That has sent prices soaring; added to this is the underlying fear that it may take the country a while to get back to normalcy and that the unrest might just spread to other oil-producing countries, most of which, coincidentally, are weighed down by dictatorships of one form or other. The IMF was reported as saying that the world economy will be able to ride out this price spike if the unrest remains temporary. But it is not clear when Libya will get back to normalcy and, even if it does after some sort of regime change, the impact of that transformation on other oil producing countries would be hard to predict at this stage. From the Indian economy's viewpoint, oil prices above $100 will force refiners to hike petrol and petroleum product prices but with the Government keen to fend off charges of idling in the face of raging inflation, refiners will be under pressure to bear some of the burden of the global spurt. In the event, the government will have to step in with enhanced oil subsidies just when such official advisors as the Economic Advisory Council are calling for fiscal consolidation. With the country so oil-dependent, further spikes could make that kind of rationalisation very difficult indeed.

India has to live with sustained high oil prices, but confront them more smartly than it has done before. Shifts in freight modes, for example from long-distance road haulage to rail or coastal shipping, can save considerable amounts of petroleum energy. Bringing more coal-based electricity generation capacity on stream can make the numerous diesel-fired sets redundant. Of course, when retail prices increase, consumers will persuade themselves to optimise consumption. While a proactive oil strategy brooks no delay, there may be no escape from the pain of higher prices.

-Umesh Shanmugam