Oil price shock
Energy use is directly proportional to economic activity once a country goes from 'developing' to 'developed'. With a liberalised climate, a strong industrial base and an economically empowered population, India has all it takes to be one of the fastest growing global economies. The importance of energy, therefore, is paramount.
With the 8 per cent growth rate envisaged in the 10th Plan, commercial and non-commercial energy requirements are going to zoom. India ranks sixth globally, accounting for 3.5 per cent of the world commercial energy demand. This is primarily met by fossil fuel sources -- coal (52 per cent), oil and gas (44 per cent), hydropower (2 per cent), nuclear (1.7 per cent) and the rest from non-conventional sources.
Lopsided energy basket India's primary needs are based on oil and gas. But with only 0.5 per cent of the world's proven crude oil reserves, 76 per cent of our oil comes from imports. This is a dangerous route to crude oil price shock. Already, the Union finance minister has highlighted rising petroleum prices as the prime threat to the nation's economy and attributed the rise in inflation to rising crude oil prices.
A country's vulnerability to world crude oil price hikes is a function of two parameters: dependence on imported oil and the economy's energy intensity. A high energy-intensive economy is an energy guzzler and represents inefficient use of energy systems. The International Energy Agency's recent report on the effect of rising oil prices on the world economy shows a country like India -- highly dependent on imported oil, with an energy intensity twice that of the us -- would suffer almost a one per cent dip in its annual economic growth if crude oil prices rose by us $10/barrel.
And make no mistake, the price rise is imminent. The world reels under a crude oil price hike to above us $55/barrel (in response to growing demand from China and India) and global oil consumption far outpaces new oil fields being discovered. Energy experts predict oil production will peak by 2025 and then start to decline. Correspondingly, crude oil price will surge upwards.
India's inflation nightmares So oil import bills get bigger, petroleum marketing companies hike automotive fuel and liquified petroleum gas prices, fertiliser plants and petrochemical units dependent on petroleum feed stocks get affected and inflation zooms. Is the government really ready for this scenario?
Instead of insulating the economy from imminent oil price shocks, the Union ministry of oil and natural gas is showing off its energy security, acquired through stakes in foreign oil fields, like ongc Videsh's significant acquisitions in Africa and Central Asia. How sustainable are these billion-dollar investments? How secure will we be once Sudan and Sakhalin stop pumping oil?
The answer lies in reducing dependence on fossil fuel -- by raising energy efficiency of installations and switching to indigenous, renewable, non-conventional sources like solar, wind and biomass energy. Even if some technologies are nascent, costly or cannot be scaled up for power generation, decentralised renewable energy projects can provide energy security to the people.
On its part, the state could invest money into research and development activities and develop a sustainable energy model. The future lies in renewables, but vested interests continue to push the use of fossil fuel energy.
Finally, a word on transportation. As the standards of living improve for more and more people, the number of cars plying on the roads will go up further. Cleaner fuel will also be paid for by consumers. As for hydrogen, the fuel of the future, let's not forget that energy has to be expended to extract hydrogen from natural gas or water. It's biofuels like biodiesel and ethanol that are truly renewable energy sources, besides being cleaner burning fuels.
Brazil, for instance, after the oil shock of the 1970s, shifted to gasahol, a petrol-ethanol mix, that continues to save its government billions of dollars in oil imports. India could well adopt the same model.
Jiju Cherian Vengal works on the impact of chemical industries on the environment