With high prices and geopolitical risks, energy security seems to be on every country’s agenda. It was the number one agenda item when the G-8 industrial countries met in St. Petersburg last summer, and it drove the agenda at the East Asian Summit last month in the Philippines.
But the meaning of “energy security” varies greatly among countries. For India, it comes down to assuring that energy problems don’t constrain the nation’s new, higher levels of economic growth. It is not just a theoretical question. For, the effects of electricity shortages can be measured in higher costs, reduced production, and lost GDP. And, after all, the present era of economic reform and higher growth in India was triggered by the oil price spike of 1990, which came very close to draining the country of all its foreign reserves.
Fast growth means continuing vulnerability, as it needs growing supplies of energy, even with greater efficiency and more use of alternatives. We investigated the scale of the challenge in CERA’s new “Asian Phoenix Scenario.” In this scenario, Asia, led by China and India, regains the majority share of the world economy it held at the beginning of the 19th century. But this presents many challenges. One of the distinctive challenges for India on which the scenario focused is the demographic: a quarter of the world’s growth in working population through 2030 will take place in rural India. This means an immense task of educating and integrating this population into both India’s growth economy and the world economy.
This economic growth comes with a big price tag in the form of energy. More than half of the rise in world oil use over the next quarter-century will occur in Asia. China’s share in this will be larger than India’s for several reasons, including the likelihood that more of India’s economic growth will be driven by exports of services than manufacturing, compared with China. Still, the growth numbers are very large. India’s oil demand, in this scenario, is projected to triple by 2030. Electric power consumption is expected to more than quadruple.
To develop this amount of new electric capacity requires the efforts of both private and public players. Domestic firms are poised to aggressively add new generation capacity, while public companies continue a steady record of construction. The pace of reforms at the state level remains a key indicator of progress, and can enable capacity expansion as the sector’s finances improve and power subsidies are adequately addressed. But the need for a stable and reliable regulatory structure and investment environment will be fundamental to meeting the needs of future growth.
In terms of oil and natural gas, growth on this scale means that India is going down a two-way street. As it becomes more integrated into the global economy as a provider of services and goods, it also becomes more integrated into world markets as a buyer of energy supplies. India’s energy companies will become more prominent around the world.
Some worry that national appetites for oil and gas will trigger a scramble for supplies and an inevitable clash between the “new consumers”—India and China—and the established consumers, the industrial countries. Indeed, that could eventuate; but that would be a loser’s game for everyone. Still, these fears of conflict are amplified by worries of “peak oil” and “running out.” CERA’s analysis of world prospects indicates that the world has ample resources of hydrocarbons. The real risks are above ground and revolve around politics, geopolitical tensions, and investment regimes.
It would be wise to recognize that the international energy business generally operates through partnerships and long-term investment. The demands of India’s domestic energy market may pose a considerable challenge, but they also create an opportunity to promote cooperation with companies from both producing and consuming countries that want to participate in that market. India itself will become a growing source of equipment for the world energy industries.
Overall, energy does not exist in a vacuum. It is only one aspect, although a very important one, of India’s increasingly complex and ever-denser engagement with the global economy. That, too, accentuates the prospects for cooperation. But there is always the risk of disruption or conflict that cuts supplies. This can come as a surprise, as India found in 1990 when Iraq’s unexpected invasion of Kuwait triggered the first Gulf crisis. Though not well-known, an emergency system for mitigating energy crises was set up by the leading industrial countries in the 1970s, after the Arab Oil Embargo, and it has been further refined in the years since. It is organized around the International Energy Agency, which is based in Paris, and involves information sharing, strategic stocks, emergency sharing of supplies, and other collaborative measures.
A disruption always carries with it the risk of a dangerous scramble among consumers for supplies—driving up prices, damaging economies, and creating new political conflicts. The limits of the existing international energy security system have become clear with the emergence in this decade of the new consumers in the world market. As the Asian Phoenix scenario makes clear, this system needs to be expanded and modernized to reflect the realities of where the growth in demand will occur. That means that one of the key priorities of energy security in the 21st century will be India’s alignment with this system, whether through formal membership or, at least to begin with, through association. That will be essential for the cooperation—and for the confidence—that India and other consumers will need to weather whatever energy stresses and storms lie ahead.
Daniel Yergin is Cambridge Energy Research Associates (CERA) chairman and author of The Prize: The Epic Quest for Oil, Money, and Power, for which he received the Pulitzer Prize, and of Commanding Heights: The Battle for the World Economy