G. Ramachandran

Crude prices are just below $70, twice their level of five years ago. Five years is a long time in economics, innovation and technology. Yet India, transfixed by its dependence on crude oil and obsessed with pricing formulae, has been too slow to respond to the rising oil price. The Government needs to promote disruptive technologies on a very large scale, pushing the economy from rickety carts to sleek locomotives and automotive engines that run on electricity, ethanol, bio-diesel and hydrogen, says G. Ramachandran.

File picture of Mr Suhas Kadlaskar, Director Corporate Affairs, Daimler Chrysler, with a bio-diesel powered Mercedes Benz... India has to invest massively in pushing the economy from gas-guzzlers to engines that run on electricity, ethanol, bio-diesel and hydrogen. — Ramesh Sharma

CRUDE oil prices shot up to $33 a barrel — a ten-year high — in August 2000 from $20 a barrel in 1999 and $10 a barrel in 1998. Oil prices have since then breached four more milestones: $40, $50, $60 and $70 a barrel. They now hover below $70, at twice the price they were five years ago.

It is logical to ask what India has done in these five years to grow the economy and serve its rising energy needs. The answer is it has done nothing too aggressive and nothing very credible.

Five years is a long time in economics, innovation and technology. Yet India has been thoroughly transfixed by its dependence on crude oil and by its obsession with pricing formulae. Therefore, it has been too slow to respond to the rising price of oil.

It has also been unimaginative in modulating its demand. The response and the modulation require a clear understanding of the principles of microeconomics. Rising demand drives up prices; rising supply drives down prices; and prices and quantity act together. But sadly, India lives in controlled-economy mode. It sees prices as the target for policy-making. It has yet to regard the modulation of the demand for oil as the apt target for policy-making.

India needs to unchain itself from its gross dependence on oil. It needs to intervene in the stereotypical progression from firewood to liquefied petroleum gas (LPG) and from bullock carts to petrol and diesel engines. If it remains chained to the barrel, innovation and investments in other fuels and renewable sources will remain stifled.

Government needs to promote disruptive technologies on a very large scale. It has to hasten the transition from firewood to fuels and energy beyond LPG.

It has to push the economy from rickety carts to sleek locomotives and automotive engines that run on electricity, ethanol, bio-diesel and hydrogen.

Dysfunctional

India's response to rising oil prices is naïve and dysfunctional. First, policy-makers do not see the Indian economy as a major constituent of the global forces driving prices up. Second, they regard rising prices as the result of long positions held by speculators in the spot and futures markets. They wishfully hope prices will decline to affordable levels every time they rise.

Therefore, policymakers hesitate to modulate the demand for oil. Worse, they fail to trigger disruptive innovation and investments in technology aimed at reducing the dependence on oil. Such innovation and investments will allow India to shift to other energy sources such as natural gas in the short term and to clean, green fuels in the medium term. But naivete holds back the green revolution in energy.

Third, political leaders do not allow the prices of petroleum products to adjust rapidly to rising oil prices. Price adjustments, such as those effected on September 6 for petrol and diesel, are delayed unconscionably. Revisions are effected after significant losses are imposed on the so-called public sector petroleum companies. The government is not the sole owner of these companies. They have significant investments from private investors. Therefore, private investors would be extremely wary of entering into energy partnerships with government in the future.

What is more, the loss meter of these petroleum companies began ticking soon after the recent revision. Oil guzzlers will guzzle as much as they want until the next hike — say, in December 2005. There are no disincentives to deter the guzzlers. There are no incentives to shift them out of oil.

Fourth, and the most glaring, energy poverty will continue to characterise a vast majority of India's households and the bigger part of the economy into the distant future. Oil will be apparently affordable at $50 a barrel after it touches $70 a barrel. But that would hardly make a difference to the vast majority.

Households deprived of the benefits of transitioning from firewood to LPG and from bullock carts to high-horsepower engines will remain where they are. They will be mired in energy and economic poverty. The small minority that can somehow pay for kerosene, LPG, petrol and diesel will continue to guzzle these.

Frog or leapfrog?

Firewood used to be the principal fuel in most domestic and institutional kitchens in India until the late 1950s. Charcoal, coal and compacted lignite replaced firewood. Then kerosene replaced them. And LPG replaced kerosene. These replacements took place because the newer fuels became `more available' than in the past. In particular, they became `more affordable' and `more accessible'. The replacements did not wait for the extinction of firewood.

But LPG has wholly replaced firewood in about 16 per cent of the kitchens. About 36 per cent of the kitchens use firewood as their sole fuel. About 48 per cent use firewood, charcoal and kerosene.

The transitioning from primitive fuels is in its nascence. The kitchens of India will need to transition faster for incomes to rise and for the economy to grow faster. The first frog-in-the-well step is to transition the 36 per cent through charcoal and kerosene into LPG. The second frog-in-the-well step is to transition the 84 per cent into LPG. However, the smarter choice is to `leapfrog them all' beyond LPG. India does not have to wait for oil to become extinct.

But the world does not expect India to leapfrog. It expects policy-makers to be logical incrementalists. They will methodically transition kitchens through charcoal and kerosene into LPG. That is why there is a pricing policy pertinent to kerosene and LPG.

The world expects India to crudely waddle around oil in the case of transportation and manufacturing as well. It does not expect India to barrel its transportation and manufacturing into newer sources of energy and feedstock. It expects logical incrementalism to move transportation and manufacturing from primitive biomass and bullock carts into diesel and naphtha. India will be a frog in the well. It will not leapfrog.

Croak from the past

Ms Mary Chung of the Financial Times hosted an online forum on oil prices, `Will oil prices ever cool down?', for a fortnight before the September 10 meeting of the Organisation of Petroleum Exporting Countries in 2000. This author joined Ms Chung's forum with two scenarios.

First, oil prices could rise to more than $54 a barrel by 2003 with a 60 per cent probability. Second, oil prices could rise to more than $70 a barrel by 2003 with an 8.3 per cent probability. The scenarios in 2000 were based on rising incomes and consumption in China, Brazil, India, Indonesia, Australia and South Africa until 2010. The scenarios did not envisage 9/11, the occupation of Iraq by the United States, the BRIC (Brazil, Russia, India and China) report by Goldman Sachs and Hurricane Katrina.

Part of the problem

The scenarios regarded India as a significant cause of rising demand for and prices of oil. They envisaged the positive impact of reforms on the Indian economy. They envisaged that policymakers would remain transfixed by oil. Therefore, India's consumption could rise from about 400 million barrels to more than 2 billion barrels (Gb) annually by 2010.

Two Gb of oil over ten years is 20 Gb of oil. That is a lot of oil. Consider the two big sources. Saudi Arabia's oil reserves are estimated at 240 Gb. The technically recoverable reserves of the tar sands in Canada are estimated at 300 Gb. Oil-hungry India will single-handedly wipe out Saudi Arabia's reserves in 120 years. The world's oil companies will need large-scale investments to extract oil from the tar sands. These reserves will then be wiped out in 150 years. It is inconceivable that any pricing policy will simultaneously grow the Indian economy and serve its voracious energy needs.

(The author is a financial analyst. Feedback may be sent to indiagrow@yahoo.com and pari@thehindu.co.in)

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