Gas pricing: What India can learn from the shale revolution3 min read . Updated: 19 Sep 2014, 08:43 AM IST
Private ownership, free entry and free pricing are crucial to tapping energy reserves
In a market, prices are set by consumer demand. But not in India, where panels upon panels are required to decide what the price of natural gas should be. Last evening, another such body recommended the right price to attract investors. It was in the 1990s that the government first lured investors with the promise of allowing free pricing, but eventually reneged on the promise. Thus, except for companies like Reliance, which have already invested in developing existing blocks, perhaps no investor would even consider putting money into India’s gas fields.
The country’s pathetic record in developing its energy market is in direct contrast to the amazing success of the shale gas industry in the US. For starters, the absence of price controls in the US energy market has allowed the price system to do what it does best: signal consumer demand. Investors have responded with enthusiasm to satisfy demand. But more importantly, the shale gas revolution, as it is rightly called given how it has drastically reduced America’s dependence on fuel imports, was built on a system of property rights unique to the country.
In line with the old common law principle, “Whoever owns the soil, it’s theirs up to heaven and down to hell," the US allows private ownership of sub-surface minerals. This has allowed private owners motivated completely by profits (not phony slogans like national energy security) to exploit shale reserves without any bureaucratic hindrance. Early entrepreneurs who recognized the potential of shale gas were free to either buy or lease rights over shale gas deposits from the owners of the land rather than knocking on the doors of bureaucrats to obtain licences.
Indian law, on the other hand, does not allow private ownership of sizable mineral deposits, let alone sub-surface ones. This automatically brings in the scope for rent-seeking through government regulation and licensing, leading to under-exploitation and wide-scale cronyism in the allocation of resources. This is quite apparent in the form of few firms in the Indian energy market. Thus, while private greed has made sure that US shale reserves have been exploited to the economy’s benefit, India’s natural gas deposits have remained largely untapped despite booming demand. In fact, much of the deposits are waiting even to be explored through proper geological surveys.
The lessons for India are clear. For one, the argument that the gas industry is a natural monopoly requiring regulation must be ended. The telecom industry was once considered the same, until the entry of competitors showed the huge potential for investment and innovation. The whole point of the market economy is unhindered competition that prevents any one business from enjoying abnormally high returns for long. Government bureaucracies do not keep monopolists on their toes as much as the threat of potential competition does. Often government failure is a bigger concern than the market failing to keep up with the standards of, what economist Harold Demsetz termed nirvana economics.
More immediately, without reforms to deregulate energy pricing and remove entry barriers to foster increased competition among private players, the current crony system will remain unshaken from its current shape. Naturally, market pricing will provide businesses the incentive to satisfy demand. But deregulating prices without tearing down entry barriers will not help much, as it would only favour current companies without helping consumers reap the benefits of competition. On the other hand, greater competition on the back of respect for private ownership, free entry of competitors and free pricing will improve supply and encourage innovation, both of which would lead to lower gas prices.
But as the current government looks as distant from the principles of free market as the previous one, all of this looks likely to remain a pipe dream.