India needs sound pricing policy to ensure energy security

Stone age did not come to an end because we ran out of stone. Some oil experts are applying this aphorism to support the new peak oil demand theory.

As the old peak oil theory loses its credibility, some oil experts influenced by the new peak demand have started to predict that oil prices may fall below $80 per barrel in the future. This would be sweet music to our energy planners. The million dollar question is which will come first and how?

 Peak oil theorists predicted that the world oil will peak as early as 1995 and later revised it to 2010. They predicted that the oil prices will increase beyond $200 to $300 per barrel. Relentless oil price increase between 2004 to 2008 reaching a high of $147 per barrel even without any major oil disruption seemed to support the peak oil theorists. However when oil prices stabilized around $100, and despite the potential disruption of oil because of Arab Spring there was no crude oil price increase, a new set of oil experts started promoting peak demand theory.

 If we look at the energy sector policy of Indian government, they seem to discard peak oil and embrace peak demand. There is no urgency to either increase energy supplies or reduce energy demand in India. Shale gas which has already changed the landscape of international geopolitics is not catching the attention of the government. Over the last two years, unveiling of shale exploration policy is still be discussed. A lot of lip service is paid to promote the supplies of renewables like wind, biofuels, solar, biogas, etc. Much discussed mission to produce 13 million tons of bio diesel by 2013 failed to take off. Now we have an equally  new ambitious mission to produce 20,000 mw of solar power by 2022. Will it succeed?

There is no energy demand policy to discuss when power, diesel, LPG, kerosene, are sold below the market price or even cost of production. All the big talks of energy conservation is simply hot air. In 1956, Shell Oil’s geologist King Hubert had correctly predicted that the US oil production will peak around 1970. However with the shale revolution in the US, he too has proven to be wrong. Hubert’s model failed to expect game changing technology developments like horizontal drilling and fracking to produce oil and gas from shale reserves.

A 2012 Harvard university study debunked the peak oil theory and showed that there is more than adequate oil reserves and world oil production will continue to increase to satisfy any future demand growth. As peak oil theory was losing steam, peak demand started to get attention. A recent joint study by Stanford University and University of California Santa Cruz predicts that the world peak demand may happen around 2035. A more optimistic study by Citigroup is predicting that the peak demand may happen even before 2020 and be no higher than 91 million barrels per day(mmbd).

Oil demand decline

One of their supporting arguments is that the oil demand has already stagnated or in decline in developed countries. Oil demand has certainly been declining in Europe. Oil demand decline seems to have started in the US which of course can change as it has happened in the past. However it has not been the case with the developing countries where increase in oil demand during the decade starting in 2002 of 14.0 mmbd has been greater than during the previous decade of 5.3 mmbd.

The model developed to study peak oil demand by Stanford and UCSC is based on the improved energy efficiency and oil substitution. It is true that the historical relationship between economic development (measured in terms of GNP) and oil consumption has been delinked in recent years. This was the case for India to some extent. India’s oil consumption grew at the annual rate of 6.2 per cent between 1992 and 2002 versus 4.3 per cent between 2002 and 2012. Still India’s GNP grew faster during the latter period.
Factors supporting peak demand are: potential to replace petrol by compressed natural gas, abundance of shale gas, improving car fuel efficiency, replacement of petrol and diesel cars by plug-in and hybrid cars, power generators in the Middle East replacing oil by natural gas, demographic trends influencing car ownership and car use peak in developed countries.

While these are compelling reasons to convince the sceptics of the peak oil demand, the proponents seem to ignore the unmet needs of the developing countries. Just like the peak oil theorists failed to consider how technological breakthroughs can add to the oil reserves, peak demand proponents may be proven wrong regarding the insatiable appetite of developing countries to consume oil. Like the developed countries, the developing countries will consume increasing quantity of oil to improve their standard of living when their per capita income increases in the future. China and India are good examples of this scenario.

It looks obvious that Indian planners are dismissing the doom’s day scenario of peak oil theorists while accepting the optimism of peak demand theory. Otherwise how can one rationalise the ever increasing oil sector subsidy? By 2030, India’s import bill will exceed $210 billions (in 2012 it was $98 billions).

It will be considerably more if oil prices were to be more than $100 per barrel. Can India afford to believe in peak demand theory and be guided by its implications of plenty of oil at lower price?  Should we need a sound pricing policy for energy sector to ensure energy security and not the one to support politicians to collect election funds illegally through diversion of such subsidies?