The oil companies are already hurting. The crude oil prices of over $75 would mean a burden of around Rs65,000 crore for the public sector oil companies this year, unless petrol and diesel prices are raised. The cabinet is unable to take a decision, for the increases would have to be more than Rs10 per litre. The oil companies are borrowing heavily from banks for working capital, and there is no appetite in the bond markets for oil bonds any more, which are fast nearing the status of junk bonds. ONGC alone is sitting pretty, for it gets more money for the little oil that it produces—truly a reward for inefficiency. There is very little attention to the fact that before Christmas, crude oil prices will be $100 a barrel, roughly translating into a price of Rs100 per litre of petrol. And let us not be surprised, if, before 2010, this doubles once more.
There are several reasons for this. At the top are the growing energy needs of India and China with the GDP growth fuelling this demand growth. The uncertainties of Iraq and Sudan and other disturbed countries are resulting in volatilities in trade. There have also been calculations that total oil availability has peaked, or is about to peak shortly, leading to a flurry of price increases.
A prime reason, little noticed, is that there has been a fundamental change in the ownership of oil reserves and resources. The earlier multinational oil majors, Chevron, BP, Shell and others, own less than 10% of the total oil reserves in the world, and the new owners are all state-owned companies, whether in Saudi Arabia, Russia, Venezuela, China or Malaysia. About 80% of all incremental production, over the current 83 million barrels a day, comes from the production of state-owned enterprises. The state, in more ways than one, has taken control of oil. The immediate fallout of this is that strategies for future oil production have changed. Unlike multinationals that focus on maximizing returns to stakeholders, state entities often subserve a larger, political agenda. These could include, as in the case of Russia, a more aggressive presence, or, as in the case of China, enhancing spheres of influence. Profits from oil revenues can now be treated as state resources, and to be earmarked for different sectors of development, and need not be reinvested in the business of oil exploration alone. There is an excitement within governments with surplus money to buy assorted assets overseas. Qatar’s gas money has helped it buy into Barclay’s Bank, and it is now looking to buy Sainsbury’s, the retail chain. Coupled with the fact that new discoveries are often in difficult, more expensive locations, it is quite clear that incremental production will soon slow down to a trickle. Already, excess of supply over demand is barely one million barrels a day, against 4mbd, only two years ago.
There is little evidence that we have a strategy in place that will help tackle a shortage of oil. We need to start now. At the top would be the concern over consumer prices, and the extent of losses that the oil companies can bear. There has to be a balance and prices must rise. It is better that they rise gradually and regularly rather than in fits and starts. And tariffs must be lowered on oil products—oil should no longer be considered a milch cow for revenue generation. The oil marketing companies need to pull up their socks. Private sector players are making money out of refining margins, which will keep going up, and product exports—strategies that public sector oil companies must quickly follow, after making necessary investments.
At the core is the need for conservation. One has only to think of the inefficient diesel generators and agricultural pump sets and wastages in commercial lighting. Japan was able to achieve 30% savings through efficiency measures after the first oil shock of 1973. There need to be legal mandates that would make the manufacturing industry incorporate modern technology with a strict timeframe and penalties. Last year, when diesel generating sets from India were exhibited at a fair in Europe, they were laughed at for their 1950s technologies. Government could assist modernization through fiscal support and financial incentives.
A strategy that oil products would be used only for transportation—sea, air and surface—and not for industrial or commercial use, would help save over 17% of current consumption. The power sector must be geared up quickly, with focus on coal, hydro-electric and, now, nuclear options.
There needs to be funding for research on alternative energy technologies. It is possible to consider collaborative research with laboratories at the forefront of technology anywhere in the world, and to forget the notion that CSIR labs are good enough. And finally, there has to be more emphasis on wind energy and solar energy.
The suggestions may only partially mitigate the problem, but at the moment, we are not even trying. The problem is urgent.
S. Narayan is a former finance secretary and economic adviser to the Prime Minister. We welcome your comments at firstname.lastname@example.org