Oil price on slippery ground

When oil prices were reigning above $100 per barrel last year, the world, including India, was anticipating oil prices going up to nearly $200 in just a few months and as such had started preparing itself for oil “independence”. Today, when prices have been in the less than $50 range for some time, the fear of just a few months ago seems unreal. Taking a U-turn, a number of analysts have actually started predicting scenarios wherein oil prices would remain cheap forever. This, of course, is in real terms and not in current prices. How realistic these predictions are, given our past experience with oil price forecasting, is anybody’s guess. But what we do need to keep in mind is that even if oil prices are low, the threat of carbon taxes can translate into an additional $25 or so per barrel, depending on the level of such taxes. India’s preoccupation with oil arises from its long-held view of oil as the ‘swing’ fuel — the fuel that was the most easily accessible in times of shortages — leading to a highly oil-dependent economy. While today we import 75 per cent of our oil needs, if we are not careful we could be dependent on oil imports to the tune of 95 per cent in the next couple of decades or earlier. Combined with the dependency created among the Indian population on highly subsidised petroleum products, India could still be facing a huge challenge if it continues on the oil path. Therefore, we cannot allow ourselves to be lulled into complacency on this front. A long-term strategic approach for India to take would be to recognise explicitly its oil vulnerabilities and take some conscious decisions to reduce the same. The two sectors primarily responsible for oil demand are the residential and the transport sectors. These are also the ones that have the least ability to cope with the burden of potentially full cost prices. With over 600 million people in the country having no access to clean cooking energy options, and with the subsidies on the cooking fuels — LPG and kerosene — going to undeserving entities, we must urgently address ourselves to the challenge of meeting India’s cooking energy needs in an efficient and environmentally friendly manner. With increasing attention being given to black carbon emissions from biomass burning in cookstoves and its consequent implications for climate change at a regional level, we will no longer be able to pretend that this energy form is ‘free’. So, where does the solution lie and is the government giving this activity its due attention? On the mobility front, India has several options for minimising its oil dependence. The obvious and oft stated measure is, of course, to move to a much larger share of rail and public transport systems rather than encouraging the booming automobile industry (apart from the current blip associated with the financial meltdown). Apart from reducing the energy use per passenger km traveled, the technological choices offered here can help drastically reduce oil dependence. Equally important, the policy on bio-fuels needs to be articulated and accepted early keeping in mind long-term energy and food security concerns. A continuing uncertainty of approach will considerably slow down the interest in technology development in the second generation technologies for bio-fuels, and in the creation of markets. Both government and industry in India must deliberately move to ensuring that any new automobile manufacturing capacity is limited to producing the more efficient hybrid and battery operated vehicles. If international prices of oil were to continue to be at ‘reasonable’ levels, India should consider itself fortunate. However, we do need a clear understanding of what can be considered as ‘reasonable’ international prices. But if this prediction, as several others, turns out to be erroneous, then what would be the impact on the country? The ability of the Indian economy to withstand the vulnerabilities created at different levels of international oil prices, remaining high for varying durations of time, should be assessed. A complete social cost-benefit analysis needs to be undertaken at an economy wide level to facilitate the right investment decisions and the right strategic choices that we need to make.