If the pace of petroleum consumption growth in 2007-08 is sustained in the current year, its impact on the economy will not be inconsequential. There are reforms outside the petroleum sector that can take the pressure off petroleum use, says K. VENUGOPAL.
If the price of beans doubles, most shoppers at the local vegetable market will have no hesitation to switch to the cheaper green vegetable and will tell the vendor so in no uncertain terms. If the price of staples such as potato or onion doubles, they may be as unequivocal; nevertheless they will buy smaller quantities.
Vegetable market economics do not seem to apply that easily to crude oil. Over the past year the price of crude oil in the international market has doubled. This should have evoked either of two responses. One, consumers would have tried their best to reduce consumption or two, producers would have stepped up their production to cash in on rising prices. In this rapid run up in crude prices, neither has occurred in any significant sense. Petroleum products are demonstrating their price inelasticity.
Rising consumption
True, consumers have protested round the world; some car owners in the US have taken to public transport to save on petrol, and airlines are even cutting down on the food and water they serve on board to lighten their planes and, consequently, their fuel burn.
Yet oil consumption in the US, which accounts for a fourth of the world’s use, is still rising, not falling. In the four weeks ended May 2, consumption rose 0.1 per cent over the previous year. World oil demand this year is expected to rise to an average of over 87 million barrels a day from 86 million a day in 2007.
True, global oil majors are on a desperate hunt for new oil and gas resources in very many parts of the earth, from the Arctic permafrost and the desolate Sakhalin islands to the depths of the Krishna Godavari basin offshore. Existing wells are being coaxed into delivering more, but many of them have left their productive years behind. The result is that the market is barely getting what it needs for now.
Take India’s domestic output of crude oil, which hit a rousing 0.7 million barrels a day in 1995-96. Despite several thousand crores of investment since then in exploration and development, it has not seen that level again; output in 2007-08 averaged 0.68 million barrels a day.
Natural gas output has also been virtually stagnant over the past five years. When the promised flows from the Krishna Godavari basin start later this year, they will only first make up for the shortfall in servings from offshore fields in Mumbai High that are showing signs of going into terminal decline.
Never mind the flat domestic output; never mind the doubling of crude oil prices; retail prices of petrol and diesel in India have been put up by only 3.2 per cent and 4.4 per cent over the year. The rest of the inflation in crude oil prices has been absorbed by government through a lowering of taxes or by the oil marketing companies through a paring of profit. There has therefore been little financial pressure on consumers to reduce consumption.
Growth-induced penalties
On the contrary, a growing economy has imposed its own penalties, exaggerating the demand for petroleum products. Congestion at airports has caused extraordinary delays forcing aircraft to burn more fuel than before.
Increased traffic on the road has made intra-city commuting times longer and more energy guzzling. Shortage of electricity on the grid has forced more people more of the time to switch to their captive gensets fuelled by diesel or furnace oil. Widening affluence is bringing LPG, the clean cooking fuel, into more kitchens displacing dung and wood. Its consumption is growing, helped along by the fact that there has been no change in the selling price.
As a result, petroleum consumption in 2007-08 grew at about 8 per cent, its highest rate for the last several years. If that pace is sustained in the current year and prices too remain around the current $116 a barrel, the oil import bill, net of earnings from export of refined products, will exceed $90 billion as against $64 billion in 2007-08. Its impact on the economy will not be inconsequential.
Any mitigation can come about with reduced consumption. The question is how that can happen if consumers do not get the relevant price signals. If the government is wary of the political consequences of using price increases to alter the consumption pattern, surely it must change policies to produce an equivalent effect on consumption. Starkly there has been no policy moves to alter favourably the demand curve.
Infrastructure deficiencies
On the other hand, there are some long-standing deficiencies in infrastructure that conspire to raise petroleum use. Diesel pumpsets stay busier than ever because canal irrigation has not expanded to as much of the country as the continuing investments in projects would suggest. And in places where only groundwater can irrigate, the lack of an electricity line makes diesel pumpsets carry the burden. Rural electrification takes but a fitful course; in any case even where the transmission lines exist, erratic supply in most supply makes recourse to the diesel pumpset inevitable. About 20 per cent of diesel consumed is in the farm sector.
Poor implementation of electricity generation projects over the past five years has not helped reduce pressure on petroleum fuels. Of 40,000 MW of new capacity that ought to have been commissioned, only 20,000 MW were added to the grid, making the overall shortage worse and consumers more dependent on captive generation. Indeed, many State grids themselves are bolstered by petroleum fuel based power plants.
India is certainly not the largest consumer of crude oil in the global sense, its 2.4 million barrels a day is a third of China’s and one-eighth of the US. Incremental consumption running at about 4-6 per cent each year for the past five years did not constitute a significant proportion of the global increment. Yet the strong growth of the past year indicates that it will begin to influence the global supply-demand equation significantly.
The question policymakers have to ask themselves is whether India should follow the petroleum-intensive route to power economic growth. Petroleum consumption growth rates in the Tiger economies of South-East Asia during the 1980s were higher than their economic growth rates. India so far has gone light on energy growth: till 2007-08, growth in petroleum consumption was half that of the economy over the past five years. In all the hullabaloo over global warming and increased carbon emissions it was a heartening performance.
The changing demand curve of the past several months must therefore be of concern. Who will bear the extra $34 billion (Rs 1,36,000 crore) on the oil import bill?
If government orders prices to remain muted and consumers do not pay the difference, the oil companies will have to take the hit which will bleed them bankrupt or the governments at the Centre and the States will need to forgo some if not all the taxes they levy on petro products.
Conservation, the key
The Dr Rangarajan Committee on Pricing and Taxation of Petroleum Products had estimated that duties on petroleum fetched the Centre and the States a total of Rs 1,20,946 crore in 2004-05. Even if the tax collections have increased in subsequent years, the oil bill’s burden on the budget will be immense.
Conservation of petroleum products is therefore a virtue that begs for policy intervention. The options are not limited to making vehicles, captive power gensets and diesel pumpsets more efficient. Indeed there are actually reforms outside the petroleum sector that can take the pressure off petroleum use.
If incandescent bulbs in the 50 million homes which have electricity in the country are all replaced by either fluorescent or LED lamps, power shortages will be reduced enough to rest a substantial number of diesel or furnace oil consuming captive gensets. Some 4,000 MW of electricity demand, equal to half the shortage during peak hours, can be saved by this move. Investment in the higher priced compact fluorescent lamps can be recovered in less than a year.
If cumbersome regulations are smoothed to make coastal shipping easier, cross-country bulk cargo movement will take the more energy-efficient ocean route. For instance, Maruti cars are soon slated to move by sea from Mundra port in Gujarat to outlets in Kerala instead of the road.
If the Railways can draw new customers to its parcel carrying service by spinning it off into a separate aggressively-run entity just as it did the container movement, a substantial part of the road movement will gravitate to the rail, which uses just one-sixth the energy that road transport does to move every tonne of cargo.
Energy savings can be had in very many other ways. Yet it will be interesting to see how a government that is unwilling to send the right price signals to consumers will be able to persuade them to adopt any of the methods.
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