India is the world’s fourth largest consumer of petroleum oil at 222 million tonnes (during 2013-14) and it imports nearly 80-85 per cent of oil it consumes, which accounts for about 35 per cent of its total import bill. Most of us tend to think that cheaper oil is good for all.
The Finance Minister will be happy since it helps him to reduce the budget deficit and budget allocation for subsidising kerosene and diesel (Rs. 85,000 crore in 2013-14).
There will be reduction in inflation, especially since transport of goods becomes cheaper. Consumers will be happy since diesel and petrol cost less at filling stations. They save money and can drive more for the same price. But the story is not that simple: there are winners and losers and the declining oil price has differing impacts in the short and long term. But is it good in the long term for energy security of India which imports most of the oil? Is it good for addressing air pollution in cities and climate change? Will the current decline last? When will the prices rebound?
Historically, oil prices have widely fluctuated starting from the first oil crisis of early 1970s, when the oil prices skyrocketed and then declined dramatically and again peaked to nearly US$ 148 per barrel (nearly 160 litres) at one time and from US$ 110 in June 2014 to around $53 now. According to some analysts, the price oil prices could fall further during 2015, before they recover and may stabilise around US$ 100 per barrel.
There are many reasons for this decline; reduction in global demand, shale oil production from USA where oil production is higher than the demand, political factors such as possibly Saudi Arabia and a few Gulf countries trying to wipe out shale oil and other competitors who can survive only at high oil prices, and possibly to punish countries such as Russia and Iran.
There are many implications for energy security for India. Petroleum consumption is projected to nearly double in India from the current level by 2030, thereby increasing the dependence on uncertain imports. If low oil prices continue, the consumption of oil may increase in India and the addiction to cheap oil will grow. At the global level, investment in oil exploration, extraction, transportation and refining infrastructure may decline, adversely affecting the long term oil production and supply.
The shale oil and tar sands oil producers may go bust at low oil prices of US$ 50-60 per barrel and technological advancements may stop. When the demand for oil increases in India in the coming years, then oil prices, which may be ruling too high in the global market, will adversely affect all aspects of the economy. Thus, energy security of India will be in jeopardy in the long term when oil prices recover to normal levels and supplies are subjected to upheavals due to geo-political factors.
Investment in renewables: Globally, investment in renewable energy sources such as wind, solar, geo-thermal and biofuels have fluctuated with oil prices. The adverse effect will be higher for renewable transportation fuels such as biodiesel and bio-ethanol. Automobile giants from Japan, Germany and USA are investing heavily on electric, hybrid and hydrogen cars, all assuming that oil prices will be over US$ 100/barrel. Developing a non-polluting hydrogen powered car could cost billions of dollars investment and years of research.
The cheap oil prices will dampen the long term investment climate on such alternative renewable technologies. Actually, the demand for electric and hybrid cars may decline immediately in Europe and USA, though in India these cars are still expensive and not popular. But in the long term, we need to move away from petroleum oil for transportation.
Energy efficiency
Energy efficiency improvements in automobiles, cooking devices and power generation using oil needs to be improved. It is true the efficiency of cars in kms/litre has improved largely in response to higher oil prices and pressure to reduce carbon emissions. Any indication of long term low oil prices may discourage investment in research and development for energy efficiency improvement in automobiles.
Increased use of oil: It is often observed that when prices of energy, especially petroleum fuels decline, consumers tend to use more, for example drive their cars more or buy bigger oil guzzling cars or SUVs. Thus, the demand and consumption of oil would increase resulting in increased imports for countries such India, with adverse financial implications when the oil prices increase in future.
Lower oil price has complex implications for carbon emissions. Carbon emissions could increase due to increased consumption of cheaper oil, buying larger or less efficient cars, reduced investment in low carbon emitting technologies such as hybrid and hydrogen cars and low incentive to increase fuel efficiency. However, low oil prices will reduce investment in high carbon emitting sources of oil such as shale oil and tar sands oil.
The International Energy Agency reported that India could be the largest single source of global oil demand growth by 2020. India will soon be the third largest oil consuming country.
To conclude, low oil prices will have positive implications for India's GDP growth, inflation, budget deficit and import bill etc. But at the same time, persistent mood of declining oil prices may increase the consumption of oil making India an oil addicted country, reduced incentives for fuel efficient automobiles, increased pollution loads in the cities, ultimately increased oil imports, when the oil prices recover.
So, let us not rejoice, but take cautious long term view and continue petroleum conservation and reduce dependence on this imported and uncertain source of energy, threatening energy security, climate change and long term development.
(The writer is professor at the Indian Institute of Science, Bengaluru)
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