Towards a Balanced Indian Energy Policy

P. A. Seshan looks at current energy prices in India and believes its time to begin shift to biofuels starting with blends of ethanol.

Published: 04-Apr-2005

lign=justify>WORLD PRICES for crude and petroleum products have been rising steadily and the New York crude price recently touched a new peak of $57.60 a barrel before receding. The price was around $30 at the beginning of last year.

The persistence of high prices over a period has raised serious concern in importing countries. The demand for crude and petro products has been rising despite growing inflationary pressures in these countries heavily dependent on imported oil and the difficulties in financing high cost imports.

The sharp increase in oil consumption in China, Japan, India and even ASEAN countries is the main reason for the soaring prices and there is speculation in some quarters of a repetition of the happenings of 1998-99. In that year, even at the prevailing crude price of $35, there was strong consumer resistance. With the importing countries drastically cutting their purchases, prices slumped to as low as $10. India's oil import bill in 1998-99 came down to $6.40 billion from $8.16 billion in the previous year.

Persistent high prices

The happenings this time have been different. Even with an increase in output of members of the Organisation of the Petroleum Exporting Countries (OPEC) and other producers, there is no sign of a significant downtrend in prices as witnessed in 1998-99.

With the Chinese economy getting overheated and India and other developing countries increasing their requirements, it is felt that the price may not come down to $40 and below in the near term.

The oil exporting countries have, of course, been arguing that their real income from shipments has not risen in proportion to the value of exports in dollar terms, as the U.S. currency has depreciated noticeably against the euro, pound sterling, Swiss franc, Japanese yen and other strong currencies. The Indian economy too has gained considerably from a strong rupee vis-à-vis the U.S. dollar. The gain against the greenback has been over 12 per cent since the middle of 2002. In the same period, the euro has appreciated against the U.S. currency by as much as 37 per cent. Even the adjusted price will be more than $36 a barrel against the earlier peak of $35. This is not to deny the advantage accruing to the European Union due to the appreciation of the euro.

Even with a dearer rupee, India's oil import bill jumped to $26.65 billion in April-February last year from $18.45 billion and $15.94 billion for the same months in the two preceding years. For the whole of 2004-05, the value of oil imports can be easily $29 billion.

As oil imports constituted 38.18 per cent of a distinctly higher level of export earnings against 33.58 per cent in the same period in 2003-04 and non-oil imports also were much higher, the trade deficit touched a new peak of $23.83 billion against $13.73 billion, in spite of record imports of $93.63 billion and an increase in export earnings by $14.85 billion to $69.80 billion. The trade gap for the current financial year may well be $25 billion against only $9.17 billion for the whole of 1998-99. The huge trade gap has however not affected the external value of the Indian currency, as invisible receipts have been steadily increasing. Forex reserves too have been on the uptrend with record FII inflows and slightly higher level of foreign direct investments (FDI).

However, it is difficult to visualise at this stage the size of the oil import bill in 2005-06 or the trend in world crude prices in the coming months even allowing for importing countries regulating their purchases and a seasonal decline in demand.

Drop in inflation rate

The United Progressive Alliance (UPA) Government is worried about the inordinate increase in the cost of oil imports, as the compulsion to raise prices for different petro products has accentuated inflationary pressures and the inflation rate rose to 8.33 per cent during the week ended August 28, 2004.

The rate has however dipped to 5.12 per cent in the week ended March 19 this year as the Government has not agreed to raise prices for petro products because of the likely impact on prices for manufactured goods based on petroleum feedstock and in freight charges. There is a disposition to await fresh developments.

The Union Finance Ministry has, of course, reduced excise and import duties on crude and quite a few petro products and the Finance Minister has even stated that the selling prices for gasoline and diesel oil could be reduced if the States also cut their sales tax rates and other levies.

While a new formula for determining prices may be evolved, efforts are under way to raise indigenous production of crude and natural gas tangibly and also conclude agreements for raising the output of crude in third countries through joint ventures. For ensuring security on the energy front, vigorous efforts are also being made to secure large supplies of natural gas from Iran and Myanmar with the construction of transcontinental pipelines.

Time for blended fuels

As these mammoth projects will take time to fructify, it will be worthwhile to determine how ethanol can be used with gasoline and even diesel oil in a big way. If only diesel oil and petrol, the former particularly, can be sold to consumers with an admixture of ethanol to the extent of 10 per cent, a saving in imports of 5-8 million tonnes can be secured. Because of a sharp drop in sugar production and the absence of any quick moves in this regard, the availability of ethanol has not been adequate.

Even otherwise, the relatively high prices for industrial alcohol have discouraged sugar mills having reasonable cane supplies to make ethanol available for blending purposes.. Since oil imports will be rising steadily, a well-balanced energy policy has to be evolved for preventing an unmanageable rise in oil imports.

P. A. Seshan


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