Planning ahead for energy
18 January 2005
As a result, by 2020 India would be importing 85 per cent of its oil, against 70 per cent today. In absolute terms this means that oil imports will go up by two and a half times by 2020. While Dr Manmohan Singh emphasised the need to increase the efficiency of energy consumption to slow down its consumption, and urged oil majors to acquire a stake in oil and gas reserves abroad, Mr Aiyar''s announcement that Indian Oil would test a hydrogen- powered car in two months suggested that he was pinning his hopes on the emergence of new technologies that would both reduce the demand for oil and make alternate fuels available at an affordable price. These suggestions make eminently good sense, but show that the government has not grasped the full magnitude of the change that has come over the world energy scene in the past four years. This is that the rise in oil prices is not cyclical but secular. In sharp contrast to what happened between 1981 and 1986, they will never go down again. This is because while the rise in oil prices in the ''70s was a product of human intervention in the market specifically the cartelisation of supply by OPEC this time it is the market itself that is forcing prices up. OPEC''s price rigging collapsed because it brought forth large new supplies from countries outside the cartel.
The renewed spurt in oil prices is not the product of a sudden revival of the oil cartel. Oil prices have risen and are staying in the $40 to $50 range because demand is outpacing supply. This is not a sudden development, but began as far back as 2000 AD. The main reason is the emergence of China as a major consumer of oil.
Till 1993, China was an oil exporter. Today it imports fully a third of the huge quantities of oil that it consumes. Its high growth rate and a continuing shift from coal to oil as the primary source of energy, will ensure that its demand continues to grow at a hectic pace. In absolute terms the growth of India''s imports is also considerable, and South-east Asia''s continued rapid growth is also fuelled mainly by oil.
What the secular rise in prices over the past five years portends, therefore, is the beginning of the end of the era of oil. Oil will remain the dominant energy source for perhaps the next four or five decades, but the higher cost of producing it from difficult areas and the ever rising demand will force all countries to confine its use progressively to higher value-added industries and products. At the lower end, such as power generation, home heating and transport, it will have to be replaced by new substitutes.
The ''energy transformation'' we are looking at will be different from any that the world has gone through in the past thousand years in two profound ways. First, each of its predecessors from animal to wind and water power in the 10th century, from wind and water to coal in the 16th to 18th, and from coal to oil in the 19th and 20th occurred spontaneously because the new energy source was so much cheaper and more versatile than the one it was replacing.
The profit motive thus worked for the transition. At the current stage of alternative energy technology development this may well happen when the price of oil rises to$70 or 80 a barrel, but by then the future of a large part of the developing world will have been sealed.