Building energy security with less oil

In recent months, there has been a welcome emphasis on India?s energy security. The petroleum minister Mani Shankar Aiyar has proactively taken initiatives to secure long-term supplies through equity stakes in foreign fields, building of new gas pipelines, etc., to meet the country?s burgeoning hydrocarbon requirements. This is good, but only half the story. The other half, that must focus on an integrated energy policy, has been sadly missing.

The complacence on this score is perhaps because of the strong cushion from India?s rising foreign exchange reserves. These have grown, despite the fact that since 2001, global crude oil prices have risen from around $25 per barrel to around $55 per barrel. Thus far, India has withstood the oil shock with ease. But the assumption that the future would be as rosy as the past is not necessarily correct.

All evidence suggests the days of cheap oil may be over. The most positive assessment is that crude oil price per barrel would range in the $40 to $50 band in the foreseeable future. The worst-case scenario was a forecast from Opec last week that, within two years, oil prices could climb to $80 per barrel. Should that happen, India?s foreign account could come under pressure, not only because of the impact on our import bill, but also because such a spike in oil prices could also trigger a global slump that may hurt our exports.

The rise in our oil import bill in recent years is already staggering. From $14 billion in 2001-02, the oil import bill doubled to around $28 billion in 2004-05. If oil prices rise to $80 per barrel by 2006-07, imports could again more than double in the next two years. While we have the ability to earn enough foreign exchange to meet this requirement, it cannot be taken for granted. External shocks can come in a variety of forms not always visible. Few had anticipated the Asian crisis that severely dented the medium-term growth prospects of our East Asian neighbours. Who could have imagined in the early ?90s that a robust economy such as South Korea would require an IMF bail-out towards the latter half of the decade?

Prudence req-uires that we take a far more holistic view of our energy policy than we have done hitherto. Even while we secure new sources of supply for hydrocarbons, both at home and abroad, an integrated approach to reduce the dependence of our economy on oil is the need of the hour. The use of oil must be displaced to the extent possible by other forms of energy.

Electricity is the most obvious and easily available option. The distortion in our energy use is palpable. While supply of electricity is tending to grow at a rate lower than our GDP growth rate, the consumption of oil is rising at a faster rate. These trends could be reversed once the linkage is clearly understood. Lack of grid supply forces consumers to use oil to generate their own power, either for lighting, running manufacturing operations, or pumping water for irrigating farms.

Even though the Electricity Act does provide an enabling framework, it is not drawing in investment in power generation at the required pace. Power sector reforms in states need to be accelerated, even if that requires greater incentivisation by the Centre if necessary. The power sector does not suffer from lack of resources; there are enough investors willing to pour in money, provided they are convinced they can get a remunerative price for their supply.

Pricing of power remains critical and subsidisation of power to the farm sector is thwarting substitution of oil by electricity. For example, inve-stors could invest for electrifying rural areas if power could be commercially priced, or transparently subsidised from state budgets. Till that happens, farmers would continue to consume oil to run their water pumps. The faster the pace of investment in electricity, the less would be India?s dependence on imported oil.

Second, we need to pump in huge investments to augment the traffic-carrying capacity of our railways, that use electricity (and not diesel) for traction. This requires doubling of track capacity on key routes, including the quadrilateral, and electrification to energise movement on these. Over the years, the weakness in railways finances has eroded its ability to fund expansion. Once again, at the root of this weakness lies the distorted pricing policy followed by the railways, that subsidises passenger travel by overpricing of freight. The result is loss of traffic to road transport, a relatively energy inefficient way of transportation compared to railways. This trend needs to be reversed. That can happen only if we stop subsidisation of passenger traffic, or find resources for that subsidy from the central Budget.

Third, subsidies on cooking gas and kerosene need to be abolished. Proper pricing of these two products would curb extravagant consumption and may even shift demand towards power where it is available. Oil, today, is relatively more expensive than grid power, a fact obscured by irrational pricing, which is eroding India?s long-term energy security. Market pricing would also release resources for oil companies to invest in non-conventional and renewable sources, such as solar, biomass, etc.

Fourth, India must find more resources for investment in urban public transportation systems, preferably based on electricity. A shift from private to public mass transport systems, as is indeed the case in many leading cities of the world, is critical to promote energy efficiency.

None of this is new. The difficulty is, there is no ownership of such recommendations. To create this, the government must consider synergising operations of various ministries such as petroleum, power, non-conventional sources etc or merging them into one so that we get an integrated approach to energy planning.

The writer is an advisor to Ficci. These are his personal views.