Rising oil prices and Indian energy crunch

Back to Forward / Inder Malhotra

NO ONE is surprised by Prime Minister Manmohan Singh's

declaration, on the eve of his departure for Japan, that at the meeting
of the G-8 and the "Outreach countries" - Brazil, China, India, Mexico
and South Africa - in Hokkaido, his "particular" concern would be to
"highlight the impact of the sharp rise in fuel prices on the world
economy."

The urgency of this issue is self-evident. There is a clear and present

danger that the soaring oil prices, combined with rising food prices,
could cause a crisis far worse than the credit crunch spawned by the
sub-prime scandal in the United States. No wonder, therefore, that Dr
Singh went on to add that there was a "need for joint action by both
producing and consuming nations."

That, unfortunately, is easier said than done. At the recent meeting of

Opec ministers at Jeddah, India's finance minister P. Chidambaram
made the reasonable proposal that the producers and consumers
should agree on a "band" within which crude prices should fluctuate.
It fell on deaf ears. An earlier plea by Tunisia's President Zine el
Abidine Ben Ali, conveyed to the World Food Security conference in
Rome, that just one dollar from the lucrative per barrel price of crude
oil should be contributed to the UN's World Solidarity Fund "to
increase the resources to combat hunger in the world," met the same
fate. The club of the richest nations, the G-8, remains unabashed
about its failure to deliver nearly half of the aid it promised the
developing countries years ago.

There are, of course, two views on the durability of the shocking

surge in oil prices. The optimistic one is that, as in the 1970s when
the first Oil Shock tripled petroleum prices almost overnight, the
"bubble" would burst soon enough though no one can say exactly
when. This assumption need not be rejected out of hand because
there is no great imbalance in the world demand and supply of oil,
especially because China's imports have turned out to be
considerably less than anticipated. Interestingly, that is precisely
where the contrary view and its strength come in.
As a former Union petroleum secretary and founder chairman of
University of Petroleum and Energy, T.N.R. Rao, has underscored,
this time around not considerations of supply and demand but
"unregulated future speculation" is determining the price of the
physical barrel. According to him, at least 60 per cent of price rise is
on account of forward trading, which should explain why governments
of most countries are denouncing future trading. Hedge funds,
"gambling desks of banks," financial groups and even pension funds
have reportedly "replaced Opec as price makers in the oil market."
Yet there is no end to the situation's irony. Some of those vehemently
holding forward traders to be "blameless" are simultaneously urging
governments in general, and the government of India in particular, to
join forward traders to hedge against the rise of crude price to levels
much higher than the current $ 145 a barrel. It is a classic homage to
the doctrine, "If you can't beat them, join them."

One foolish act in West Asia - what with the unending war in Iraq, the
even more endless conflict in Palestine, the Israeli air force's
provocative exercise for an attack of Iran's nuclear facilities, and the
horrifying mess in Afghanistan climaxing in the ghastly attack on the
Indian embassy - can spin the situation out of control, and convert the
nightmare of $ 200 a barrel into reality.

It is against this grim global backdrop that this country has to manage
its agonising energy crunch. The task is stupendous. The
commendable goal of first maintaining the nine per cent rate of
growth and then raising it to a double-digit figure would require
anything between 10 and 15 per cent annual increase in energy
supply. The question is how to produce it, and at what cost?

Ever since the signing of the July 18, 2005 agreement with President
George W. Bush on the civilian nuclear cooperation, the Prime
Minister has been emphasising that the primary aim of the deal is to
safeguard India's energy security. His critics dispute this and assert
that the whole exercise is for strategic partnership with the US.
However, in any case, most of world is reverting to nuclear power as
a clean source of energy, and the Indo-US deal does promise this
country nuclear fuel, technology and equipment. But, even if the deal
goes through, it would take at least a decade for new nuclear power
reactors to start functioning. The same will be the case with the Iran-
Pakistan-India gas pipeline that, despite apprehensions about its
safety during its transit in Pakistan, has many merits, and should,
therefore, be expedited. Yet in both cases there would be the problem
of costs. Both nuclear power and Iranian gas would be costlier than
the energy available from coal-based power stations though these
produce carbon dioxide and aggravate the problem of climate
change. Coal is indeed the cheapest as also the largest source of
electricity generation in this country. In the foreseeable future its
share would increase from two-thirds to 70 per cent. Hydro-power
can be cleaner and useful but its future supply would depend largely
on cooperation with Nepal and Bhutan. The latter is very helpful; the
former, alas, is not.

As for renewable sources, the irony is exquisite. Just one per cent of
this country's land area can generate practically half the electricity it
needs. But apart from institutional shortcomings, the high cost of
solar power is a big roadblock. In developed countries they are
talking of a tax on coal to cover the expenditure on obligations under
the Kyoto Protocol to make alternative sources more attractive. Here
that would be unacceptable.

The share of oil and gas in India's electricity generation is no more

than 10 per cent. But in the overall use of commercial energy, their
contribution is as high as 36 per cent. The proportion of imports
compared with domestic production has been rising fast, the latest
figure of oil imports being 110 million tonnes. To pay for such huge
quantities at current rates can play havoc with the economy.