Can India Gamble on Oil Price? $20 or $200 a Barrel?

Since the mid-90s, oil experts have agreed upon one thing that no one has a perfect crystal ball to predict oil prices. Most forecasts made by experts and institutes like the International Energy Agency, the US Department of Energy and the World Bank for 2010 were in the narrow range of $20 to $30 per barrel. It looks like all of them are likely to be proven wrong.

However, now this range has widened to such a level that oil price forecasting with any degree of accuracy will be a hopeless task.

When crude prices were fluctuating above $60/b in 2006, former chairman of BP had predicted long-term crude price forecast of $25 to $30. Recently, the Shell chairman predicted that a price of $150 could not be ruled out. Then there are increasing number of doomsayers who believe in peak oil theory. They are predicting a disaster scenario of oil production declining from the current level of 85 million BD when most see the oil demand increasing to 115 million BD by 2030.

One of the basic factors behind this uncertainty is the lack of transparency in the reported OPEC oil reserves. These may be overstated to secure higher production quotas by some countries as claimed by several analysts. As an alternate scenario, if we assume that OPEC has been successful in adding reserves equal to production since 1980, OPEC reserve/production ratio falls to 34 from 70.

Even this can be considered as optimistic since many national oil companies have not been able to invest the needed money and technology to discover new reserves. We also need to look at other more optimistic scenarios. According to a 2000 US Geologic survey report, one trillion barrels of oil has been produced so far and there are three more trillion barrels to be produced. Those who forecast lower crude oil prices are influenced by this optimistic view of reserves.

There is some similarity between the warning of impending disaster of global warming and the increasing uncertainty surrounding oil pricing. In the case of global warming, there are still some sceptics who still question the science behind global warming. The US believes that it is better to depend on the free market to face the 'inconvenient truth' of global warming than taking action now to reduce green house gases.

It has been shown that cost of avoiding global warming is a fraction of the potential losses whereas the steps to be taken to avoid oil crisis are not simple. It may involve radical lifestyle changes. Despite ample proof of global warming, there is much resistance to take the needed steps to face global warming. However in the case of oil, peak oil theories are not readily accepted. Therefore it is likely to be even harder to plan and reduce oil demand when there is a wide range of opinion on oil reserves, prices, politics behind production, and potential breakthroughs in discovering new low cost energy sources.

In the case of developed countries that are addicted to oil, strategies needed to reduce oil demand even in relatively energy efficient Western Europe are extremely difficult to implement. In the US, whose economy and lifestyle has evolved completely based on ever-available ample oil at low prices, changes needed are totally radical and no political party will have the courage to implement them. In fact, not even leading NGOs have dared to spell them. Such recommendations will be totally ridiculed.

Fortunately for us in India, we have the luxury of making the needed correction. We are only at the initial stage of the so-called Western model of development. We also have the example set by leaders like Mahatma Gandhi who had attempted to teach us the need to lead a simple life. But he was far ahead of his time. It is time we be guided by his teaching.

It is here our history and culture of respecting nature and living within means should help us make course correction. Instead of blindly following the rest of the world in this energy race to control oil reserves and access which has started only recently in real earnestness, we need to be the leader to show how we can have a different life style by consuming minimum amount of energy.

India for example does not have automobile ownership of the west even when we consider two wheelers. Also our economy is not yet driven by auto sector and wasteful consumption to maximize the gross national product. Instead of having the national goal of ever increasing GDP, we should set the goal to reduce the grinding poverty level.

Some may argue that is exactly what we have achieved by decreasing poverty level from 55 percent in 1973 to less than 26 percent currently. Even this not so impressive performance of reducing poverty is mostly because of basing it on low poverty standards of just meeting calorific food needs. When more than 77 percent of Indians are earning less than Rs.20 a day per person, how can we claim to have made a dent on poverty level?

The National Commission for Enterprises in the Unorganised Sector made the shocking revelation in a recent report.

Having made all of the above observations, I am of the opinion that no amount of planning, however good it may be, can work as efficiently as pricing of energy. It is here we have failed because of competitive and populist politics. We in India seem to be having faith in the government's ability in setting prices, especially in energy sector.

In the energy sector alone, not only have we failed to give proper pricing signals to minimise energy use, we have built a subsidy superstructure to assist the politically connected class to the tune of Rs.90,000 crores per year. Unless this subsidy superstructure is removed, achieving energy efficiency will be a pipe dream. When and if crude oil prices reach $200, this will be forced upon us in a violent way.

While recommending removal of energy subsidies, we are not suggesting that we have no responsibility to help the poor. We do. But we can do that more efficiently through smart card as recommended by the planning commission.

The Integrated Energy Policy recommendation of the Planning Commission reported last year was not based on high oil prices. It was assumed that crude oil prices would follow the trend observed during 90s when it fluctuated between $20 and $30 a barrel. It is true that on purchasing power parity basis, India has one of the highest energy prices. For the middle class and rich, such high prices have no relevance as evidenced by their increasing per capita energy consumption. It is comparable to the one in developed country. There is an urgent need to redo the energy planning based on the latest thinking on high crude oil prices. This is an inconvenient truth we need to face.

(Dr. Bhamy V. Shenoy is an international energy expert. He can be reached at bhamysuman@hotmail.com)


More by :  Dr. BhamyV. Shenoy

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