The price of crude oil rose above $140 a barrel this month. The world at large is getting used to high prices at the pump, and even the Indian government finally decided to let the Indian consumer have a taste of what is to come by marginally increasing the prices of petroleum products.
Various theories are being advanced for this unprecedented rise in the price of petroleum — from the machinations of speculators to the derived demand for energy due to the growth of economies such as China and India. The rise in global oil prices even provides a handy excuse to the Indian government for the recent double-digit inflation.
India urgently needs to develop. Energy and economic vitality are conjoined twins. Energy is the binding constraint that faces all of humanity, not just the developing economies. Of course, given the projected increase in demand and the decline in the supply of fossil fuel energy, the price of energy will continue to move up — with predictable adverse effects on the growth prospects of the emerging economies.
The advanced industrialized economies were lucky to have had their development fuelled by cheap fossil energy. Today’s developing economies have a much tougher challenge. It was a very short window of opportunity which opened just about 150 years ago and is likely to close in the next 40 years, by when the known reserves will be depleted at current levels of consumption.
All told, 200 years is a very brief interlude considering thousands of years of human civilization and hopefully hundreds of thousands of years yet to come. At some time in the distant future, they will look back and remark that the age of fossil fuel was a short inflection point, a point at which humanity passed through the bottleneck of dependency on oil from the ground. Before that point, humanity’s primary source of energy was the sun, and so it will be after that point.
All sources of energy — fire, coal, oil, nuclear — for human use have been the result of discovery and invention. Some entity somewhere invests what it takes for research and development, usually some corporation in search of profit, and invents the technology to exploit some new source of energy. All indications are that solar energy will be the major player in the next stage.
Solar energy is non-polluting, abundant, widespread and inexhaustible. India’s development, if it has to happen, will depend critically on whether it has the technology for converting the abundant incident sunlight — insolation — into usable energy. The question is whether India will develop that technology for domestic use as well as for export or, as it has done for all the previous technologies, wait for others to do so and then import it.
It is important to remember that governments do not develop technologies. They do not have a comparative advantage in the type of skills needed for invention and discovery. Which is not to say that governments have no role to play in the process. On the contrary, private players succeed or fail in developing technologies to a large degree on the conditions created by the government. Governments help by outlining the broad goal, assisting with funding, and encouraging competition among private players. Public policy creates the necessary conditions for private enterprise to deliver.
High oil prices can be reasonably expected to continue till the end of the age of oil. For prices to fall, either the supply has to increase or demand has to fall, or both. There are really no reasons for oil producers to increase the supply. Oil is an exhaustible resource whose optimal rate of extraction is dictated partly by revenue requirements of the producers. At current high prices, they meet that goal at low levels of production. If prices climb higher, paradoxically the supply may contract even further.
The road ahead is steep for India, made steeper by rising energy prices. But this is a blessing in disguise because it is a wake-up call. There is time to prepare for a post-peak oil future. Independence from foreign energy — whether oil or nuclear fuel — is not an option but an absolute must. That will only happen if India develops the technology for solar energy use in all its forms, such as concentrated solar thermal and solar photovoltaics.
Solar technology is at its infancy. Costs are constantly declining but it will be several years before it achieves “grid parity” — costs comparable with conventionally generated electricity. Costs have fallen by 20% for every doubling of installed capacity. Projections indicate that by 2020, installed solar capacity will be 20-40 multiples of current levels. Even then, solar electricity would account for only 3-6% of total electricity generation. Solar energy has a long and promising future. How quickly that potential is realized depends on national will.
India has a lot of advantages in this regard. It is a large country and can afford the human and financial capital required for the challenge. As John F. Kennedy had observed regarding the manned mission to the moon, we must do this not because it is easy but because it is hard. Challenges don’t come any harder. India needs the vision to face it and win.
Atanu Dey is chief economist of Netcore Solutions. Comment at email@example.com