After blaming the big, bad and conveniently invisible speculators for the oil price surge, politicians have come up with absurd and impractical solutions to tide over the crisis. Little do they accept that the only long term solution is to promote alternate energy sources. By Shivshanker Verma

'I speak with great anguish because the goals that we have set for ourselves are in grave peril. Oil prices threaten to wipe out the economic gains made by developing countries in recent years'. That was finance minister P Chidambaram at the Jeddah Energy Summit, organised by Saudi Arabia to discuss rising oil prices. There is no doubt that the economic goals set by countries like India are indeed in grave peril because of unaffordable energy prices. But the solutions politicians have so far come up with are absurd and impractical.

Chidambaram's solution, which he presented to the Jeddah Summit with the verve of an academic proposing a new hypothesis, is to fix a price band for crude oil. The producers are assured of a base price and consumers are guaranteed an upper limit, irrespective of global economic conditions and demand-supply imbalances. Makes sense as a concept. But, what is the ideal price band? What is the minimum price which producers should get and the maximum price consumers should pay? Who will determine those prices, producers or consumers? If a band can be fixed precisely, why not take its mid-point and declare it as the fixed price. Maybe, we can do this every year and do away with all the speculators!

British prime minister Gordon Brown has a more innovative and visionary approach. So his solution is to encourage the oil exporting countries to invest their surpluses in alternate energy research in consuming countries, like Britain. In Brown's view, this will ease the pain on consuming countries by channelling back to them the excess cash they paid for oil. But, why on earth would Saudi Arabia invest in developing alternate energy and endanger its own economic future? Even if the oil sheikhs decide to do so to remain the dominant global energy suppliers in the very long term, why would they invest in other countries?

The most absurd of solutions was by a commentator in New York Times. Thomas E Evans, an advisor to Ronald Reagan and Bush Senior, wants the US to sue OPEC for antitrust violations! He claims OPEC can be sued for rigging prices by forming a cartel. Evidence? The OPEC meets frequently to assess the oil market and fixes production quotas for member countries. Nobody disputes that, not even OPEC. But, can you reasonably expect the Bush administration – or even an Obama administration – to sue OPEC?

The real solutions to the oil crisis have to be more long-term and will start with the acknowledgement that we are facing a long-term energy crisis, not just a short-term jump in crude oil prices.

Pay back those who preserve oil
Until the late '90s, given the history of precariously low exchange reserves, preservation of foreign exchange reserves was a big priority for India. The government was always willing to dole out all kind of monetary and other benefits to those who earned foreign exchange, while making it extremely difficult to spend in foreign currency. Import substitution was a major priority and annual reports of government companies described at length their efforts to save "precious" foreign exchange. Earning a handful of dollars was almost heroic, spending them was condemnable!

Though it is another set of government policies that led to the foreign exchange shortages in the first place, when viewed in isolation, the government's responses were not inappropriate. The efforts were to preserve a scarce commodity through a range of incentives and restrictions. Crude oil will become a scarce commodity sometime in future and the government should consider providing financial incentives for achieving improved efficiency.

Increase excise duty on cars which run less than 20km on a litre of fuel, on average. Fuel efficiency should be independently certified after extensive testing in different conditions. Push up the cut-off limit to 25 km per litre after ywo years and 30km per litre in five years, to coerce car manufacturers to strive for better fuel efficiency. Similarly, efficiency standards may be prescribed for commercial vehicles and buses.

Withdraw excise duty, VAT and road tax on electric cars and hybrid cars. Add a condition that the tax benefits will be available only if the cars are manufactured locally. It is true that electric cars use electricity generated by power plants running on coal or natural gas, and hence consume fossil fuels in an indirect way. However, they are much more efficient than petrol or diesel-driven vehicles.

Follow the example of Brazil and promote the use of sugarcane-based ethanol as automobile fuel. Like Brazil, India also has extensive sugarcane farming and can produce ethanol without diverting cereals like corn. Most cars in Brazil have flex-fuel engines which can run on a mix of petrol and ethanol, and some cars there can even run on pure ethanol. Give excise duty benefits to promote flex-fuel vehicles. But don't even think about distributing pure ethanol through petrol pumps like in Brazil, for obvious reasons!

Rebuild the power sector and urban transport
In this country, all those who could afford to buy gensets already have them. If you can afford one, but don't want the hassle of owning one, you can always lease one. There are all types of gensets available – from small ones for home use to mobile gensets mounted on trucks which can light up an entire office block. They all run on either kerosene or diesel, both fuels heavily subsidised, which makes the gensets even more popular.

We cannot do without gensets only because our power sector is short in capacity – both in generation and distribution. Much of the power generated is lost in transmission and distribution losses, mostly due to illegal users. What finally is made available to consumers is grossly inadequate. Except for some brave souls like Anil Ambani and Ratan Tata, there are not many who are willing to set up large power plants. Because, even if the plants are built, there is no guarantee that the distribution system will be revamped in time. Some state governments are resisting the corporatisation of electricity boards because this initiative has been dubbed a failure in some other states which started reforms earlier. The distribution system revamp is seen as a failure because it was not implemented as it should have been, and the story goes on.

Power sector reforms are absolutely vital in our quest for more energy security. Just by preventing wastage and the theft of power, this country can get rid of all diesel and kerosene gensets – even without adding a single megawatt to generation capacity!  The ultra-mega power projects are off to a good start and the government deserves full credit. Hopefully the projects already awarded will be completed in time, despite rising interest rates. The Indo-US nuclear deal is as good as dead, so forget about nuclear energy and focus on increasing natural gas supplies into the country.

Next on the priority list should be urban transport infrastructure. Expedite the metro rail projects in our big cities and introduce dedicated bus lanes with large capacity, comfortable buses. Dedicated bus lanes should be introduced in all state capitals and tier-II cities on a priority basis. Issue natural gas distribution licenses for all major cities and make it mandatory for all buses, taxis and three-wheelers in such cities to run on CNG.  With Reliance and others set to start production of natural gas, domestic availability of natural gas will be more comfortable and reduce dependence on imported crude oil.

Of course, these are easier said than done and require lot of groundwork and coordination between the centre and states. Setting up a national level urban infrastructure implementation panel with representation from various state governments – like the panel for VAT implementation – would be a good start.

Invest big in alternate energy
With crude oil expected to average well above $100 per barrel, the total fuel under-recoveries may cross Rs3 lakh crore this financial year. That is a truly astronomical sum, but we don't get the full import of it as the cost is shared between the oil companies and the government. The latter has conveniently shifted the pain to future governments by not absorbing the subsidies in current budgets and issuing oil bonds which will mature many years down the line.

Compare the money spent on oil subsidies to the total investments in alternate energy research. As  another domain-b columnist Vivek Sharma pointed out in one of his blog posts (See: Government's energy priorities), the ministry of new and renewable energy spent a princely sum of slightly over Rs6 crore during the month of April this year on Plan expenditure. For the whole of financial year 2007-08, the ministry had a total budget of Rs633 crore.

It seems the ministry really had to struggle to spend even that much, as the actual spending for the first 11 months of last year was less than Rs350 crore. This number includes all Plan and non-Plan expenditure. Full year data is not yet available on the ministry's website.

Rs350 crore is what this country burns as oil subsidies every 12 hours. And the ministry responsible for encouraging research and development of alternate energy sources and secure our energy future struggles to spend that much in 11 months!

The ministry of renewable energy has a financing arm called the Indian Renewable Energy Development Agency (IREDA), which provides financial assistance for renewable energy and conservation projects. IREDA says the country has the potential to generate as much as 80,000 MW of renewable energy-based grid connected power. To put that in perspective, 80,000 MW is what 20 ultra-mega power projects will generate. So far, the agency says, the total installed capacity in such projects is just 6,000 MW. IREDA doesn't talk about actual capacity, but it is likely to be much lower than installed capacity.

Since inception, IREDA has approved over 1,800 projects with total generation potential of close to 3,000 MW. Against the total loan commitment of more than Rs8,000 crore, the agency has distributed just about Rs4,500 crore until March 2007. Surely, this country needs much more than that!

The government should spend at least 10 per cent of the total oil subsidies, or Rs30,000 crore a year, on alternate energy research. A dedicated facility for renewable energy may be set up under CSIR and half of the total budget may be allocated to it.

The other half should go to support private sector research initiatives. Declare that the government will fully reimburse the research and development expenses incurred by private companies for any renewable energy technology, after commercial viability is established.

Pity, none of these will happen. This government, and the next one, will continue to blame oil speculators and come up with impractical solutions like the price band suggested by P Chidambaram.

And, the single biggest threat to our economic future – our dependence on imported oil – will hang above our heads for the foreseeable future.