As oil prices have galloped in recent months, the nationalised oil companies have been crying themselves hoarse that the government's reluctance to correspondingly increase prices at the pump has been devastating to their bottom lines. The administration has walked a fine line between conceding their demands for a price hike and pacifying its Left allies who are quite set against this. The result has been only a modest increase in retail prices despite a huge jump in the price of crude.
Of course, the degree of retail price fluctuations need not match those of oil prices. The price of crude is only one portion of a long line of costs leading up to the retail price, and it is quite possible that the oil companies could tolerate some increase in the price of crude without having to pass on the cost to their consumers. In India, however, despite the relatively high taxation of fuel, the price of crude is still an important factor. This is one reason why our sensitivity to this base is higher than in Europe, where the even taxation of fossil fuels is even higher. Our pump prices are nearer to the US averages than to those customers pay in Berlin or Copenhagen. Therefore, as global crude oil prices rise, their impact on the fortunes of Indian customers - or taxpayers, while the market remains monopolised and regulated - also arrives fairly quickly.
It has been suggested that the increase in the price of crude could be offset by lowering duties and taxes on fossil fuels, so that consumers would continue to find the same prices. But this would merely postpone the inevitable reckoning, delaying the necessary changes in policies for production and consumption of energy. Indeed, one might argue that if taxes on fossil fuels were higher, this would reflect the reality of our natural resource constraints more accurately, and could additionally compel the government to respond more urgently to the policy lacunae.
The reality is plain - India has neither the capacity for meeting its domestic demand, nor have oil managers shown the international economic wherewithal to corner the necessary resources at special prices. Thus, we cannot afford the same laxity in responding to such changes that the United States might, thanks to its projection of power, or Europe might, having insulated itself somewhat by imposing an already high level of taxation and thus proportionately reducing the impact of crude prices. The foreign exchange mountain built up during the last two years can buy our way out of the dilemma to some degree, but this is a finite reserve that protects other strategic interests too, and cannot be expended simply in balancing the books. Moreover, as demand continues to rise, the forex escape hatch isn't even likely to be wide enough to permit the economy to pass through without severe bruising. The rupee's recent slide against the dollar - the currency of the oil markets - doesn't help, either.
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The Union Ministry of Petroleum and Natural Gas is our steward for public policy on oil and energy. The Ministry's website admits that oil consumption in India is increasing steeply, and that present indigenous production is less than half of the demand. As advice, the Ministry urges judicious use of oil energy, and chiefly for essential needs. But this is laughable - fostering 'judicious use' and restricting it to 'essential needs' is simply nice rhetoric; what's needed is action that increases efficient use in the short run and reduces dependence on fossil fuel in the long run.
Emphasise efficiency
Consider one example where the oil conservation rubber must literally meet the road - transportation. Well designed public transportation systems that can quickly and uncomplicatedly move large numbers of people within metropolitan regions are very much the need in India. They can take thousands of cars off our congested roads and slice a portion of our oil import bill. The Ministry's own Auto Fuel Policy report of 2002, which was summarised by Rasika Dhavse in a 2003 article on India Together, said that to meet a kilometre of passenger travel, a car consumes nearly five times more energy than a 52-seater bus with 82 per cent average load factor. "A car occupies 38 times more road space compared to a bus for a passenger kilometre. The skewed economic costs of personalised transport and its demands on road infrastructure are thus obvious." The fuel policy report, however, laid this mess in effect at the door of State governments, since transport is largely a state/local issue, aside from Central government-backed infrastructure financing matters.
Delhi's example is indicative of how difficult it might in reality to build less expensive mass transit systems that rely large buses moving on dedicated lanes, than more expensive ones. Despite support from Chief Minister Sheila Dixit, the Delhi HCBS project ran into implementation issues. "The HCBS is a low-cost, flexible, mass transportation system that costs 50 times less than a Metro system and can serve as much as 100 times the area of a rail-based system," said Geetam Tiwari, a Transportation Planning professor at IIT-Delhi, in an interview to India Together in 2004. Tiwari hinted then that coordination and turf wars on land use between Delhi's land managers and public utilities botched up the early possibility of dedicated corridors for the buses, very critical for this system. (There appears to be some progress on this front, now, going by news reports.) But as a nation our cities are only beginning to inch towards such projects, with our decision makers and bureaucrats hustling between cutting out public participation and inter-sectoral coordination, and many individuals themselves preferring to put large capital private projects on the fast track.
Steering a better policy course
All this isn't the Petroleum Ministry's fault, but the Ministry isn't blameless, either. There is much it can do in the existing scenario. Auto transport fuel demand will diminish if we have more fuel efficient automobiles; here the Ministry has avoided taking a serious regulatory role. While most talk of auto standards in India have had to do with advancing emissions standards, the Mashelkar Committees recommendations (while being controversial on the CNG question) that auto makers must be asked to commit their vehicles to better fuel efficiency standards has been not been acted on. Fuel efficiency norms are being more stringently pursued by auto makers in the developed nations, ironically, even though India itself is far more at the mercy of the oil markets.
The Petroleum Minister has preferred to look for new sources instead of tackling inefficiency is use. In this he has cut quite a figure travelling around the oil world apparently bent on expanding India's access to reserves, sometime in dubious destinations run by marauding warlords. But that route too is only likely to offer temporary solutions; eventually cornering resources becomes a game of confrontation with others of similar mind, and whatever that might do the geopolitical balance of power, it cannot possibly do much good to tightrope walk on oil in the short run. Also if, as in the example of the Chinese company that offered to buy the US oil firm Unocal, some foreign governments were to reject the efforts of Indian oil firms to acquire assets in their nations, that option too could be blocked.
The Minister's quest for more oil could at least partially be met from savings through efficiency, especially given the little success to date to show for his efforts. The sensible long term alternative is to think outside the barrel, and to begin to put serious efforts into building alternatives to all fossil fuels, not just oil.
One argument regularly trotted out against alternative fuels per se is that they are not yet cost-effective. This isn't an excuse, it's simply part of the problem itself; we haven't put our weight behind these alternatives adequately for the infrastructure and output to be of any significance. When the energy policy itself is redirected to place greater emphasis on alternate fuels, the economies of scale necessary to make them viable can be developed with help from small and large private enterprise. The Ministry of Petroleum has just announced a policy to allow oil corporations mix up to 20% of standards controlled bio-diesel with conventional diesel from January 2006 for sales at the pumps. This is a small step forward, but isn't enough.
There is also a role on the broader energy question for the Ministry of Non-conventional Energy Sources though it isn't clear how seriously the Cabinet relies on this quarter for advice. Plausible alternative sources - wind and solar - have often been dismissed as being too inefficient and lacking in infrastructure to be viable on large scale, even as the MNES funds/subsidies specific projects and products. Wind energy deployment may be on the rise in select states, but not fast enough. The mushrooming of firms distributing and installing solar power at homes and offices in our cities is indicative of growing enterprise in greener energy that needs broader backing. Also, the fact that substantial numbers of our rural districts are not electrified and short on energy in general also make them open to leapfrog directly into greener and decentralised power sources.
Broadly, the government must facilitate a constellation of initiatives and a more progressive policy framework that will shift the nation to less dependence on fossil fuels. This was never an impossible task, but is now an urgent one.