Need to diversify the energy basket

Need to diversify the energy basket

Happily, we are meeting our energy requirements at prices that are reasonable in the context of global prices. A recent government decision dismantling the administered pricing regime for gas is welcome from the market perspective. The long-term energy security scenario, however, would call for focused attention. India aspires to be among the top three economies in the not-too-distant future and that will require a substantial increase in the consumption of petroleum products. The International Energy Agency estimates India’s crude oil consumption to be growing at a rate of 3.9% per annum up to 2030—the highest in the world, compared with China’s 3.5% and the world’s 1%. While our dependence on imported crude oil will go up from 80% to 92% by 2030, India’s domestic production is estimated to fall from 0.75 million barrels per day (mbpd) to 0.3 mbpd by 2030.

In this context, there is need for some introspection on the role of exploration and production (E&P) firms in the public and the private sectors. Exploration is an extremely risky enterprise and risk-taking needs to be incentivized by all means through an imaginative policy regime. At the same time, how would we meet increasing demand for oil at the prices which are in the offing? Global oil reserves are estimated to be sufficient only for the next 30 years. Global production has to go up by six times Saudi Arabia’s or six times Russia’s to meet world oil demand by 2030. But the investment trends in E&P don’t hold much promise that this will happen. In such a scenario of demand-supply imbalance, prices are bound to shoot up. And that will have devastating effects on the country’s economy at the macro level by way of raising the import bill, which is around 7% of gross domestic product, and at the micro level in the form of high retail prices.

The doctor advises diversification from oil and fat to fruits and vegetables to prevent clogging of arteries. Crude oil consumption, the way it is growing, may affect the arteries of the economy at prices beyond $100 (Rs4,680) per barrel. We must, therefore, diversify the energy basket to reduce the consumption of crude oil and switch to substitutes, namely natural gas, biofuels, and other non-conventional forms of energy; improve efficiency of energy use; and accelerate domestic E&P efforts. Otherwise the energy crunch and high crude prices may put a question mark on our cherished economic prosperity.

Pricing petroleum products

Decontrolling prices is a tough call for the government, but the recent decisions are appropriate. Kerosene, liquefied petroleum gas and diesel continue to be heavily subsidized while petrol price has been decontrolled. In the prevailing socioeconomic context, it is necessary to balance the interests of the oil marketing companies, the upstream companies, the state exchequer and consumers.

The most important element in product prices is the level of taxation, which is high and varies from state to state, up to 50% for petrol and around 35% for diesel. More importantly, the taxes are levied on an ad valorem basis although petroleum prices are highly volatile. The state governments benefit disproportionately at the cost of the consumers when oil prices rise. There is a need to look into the entire taxation structure and replace the ad valorem rates with specific rates. With efforts under way to put in place a goods and services tax, let us hope that a way forward is found in respect of the taxation regime.

R.S. Pandey is a former petroleum secretary.

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