:: Inder Malhotra

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.