Oil sector: How can we fix the mess?

We raise an alarm every time oil prices go up. There is the usual flurry of debates and expression of concerns as long as the crisis lasts. The moment prices go down the wolf is seen to go away, even though he is lurking very much in the shadows, and in fact getting more dangerous even as our consumption of oil keeps ratcheting higher and higher.The truth is that as long as our dependence on oil keeps growing so also would our vulnerability to sudden increases in global prices. There are no short-term solutions; only temporary palliatives.The point to be made is that in the short term there is little that any Government can do insulate the economy from sudden price increases in the global oil market. The answer lies only in specific long-term measures and a clear articulation and implementation of a long-term energy strategy, which unfortunately is missing in India. The basic reality is that our dependence on oil has been going up due to silent and continuing failures on many fronts. Our power sector is in a deplorable state. To make up for shortages and disruptions in electricity supply, industries, households, farmers, shops and hotels, all install oil based substitute devices to provide power. There are no firm estimates on the oil-based captive power capacity existing in the country, but it is probably around 20,000 megawatts in all. Our shift from rail to road transport has also locked us in to energy guzzling transport system, intensified by poor roads and traffic patterns that only make road transport even worse in terms of energy efficiency. These of course are problems on the demand side of the oil economy. There are several issues on the supply side that need continuing attention. Much more also needs to be done for using substitutes for oil, such as natural gas, which can be imported from our neighbourhood. The present foreign minister is making vigorous efforts on this front, but in the past we have had a stop-go approach in this direction. A significant part of our hydropower capacity is still untapped and renewable sources of energy, which provide a range of immediate and long-term options need serious development. In the case of oil exploration a problem has existed in the manner in which decisions have been taken. A major overhaul of the apparatus dealing with this subject is essential. The government would do well to take a second look at the P K Kaul committee report which went into all these issues but its recommendations required some bold measures which were not found politically convenient at the time. The entire oil industry needs urgent restructuring and opening up to new players. But before doing so we need to put the right regulatory structures in place. The experience of power sector reforms has shown that merely announcing a policy to open a sector is not enough. The private sector would look for a strong and independent regulatory structure which would ensure that commercial organisations can function in an environment of rational prices and reasonable returns. But in the current scenario even the decision to do away with the administered pricing mechanism (APM) by 2002 seems to be clouded by uncertainty. This is not good news for potential investors. Nor is the lack of clarity for disinvestment in the sector a particularly reassuring signal of the government?s intention to create a more efficient and competitive hydrocarbon industry. There would be those who would call for populist measures to get over the current oil price problem. But this would be a shortsighted approach and harmful to the economy in the long run, as indeed has been the case with such measures in the past. The biggest benefit from the current crisis would emerge only if the Government takes in hand seriously the task of developing and implementing an effective long-term energy policy for the country.