Energy security is the answer to India's woes

Wed, 30 Oct Pre-Open

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Energy security is critical for the survival and stability of a nation. However, India cuts a sorry figure in this regard. With over 80% dependence on crude imports, the country stands vulnerable. And no amount of positive economic statistics can soothe the concerns that stem from being reliant on other nations for something as crucial as energy needs.

The high dependence on oil imports is not just a sectoral issue now. Oil imports account for highest share in the country’s import bill and have to be paid in dollars. Hence, a continuous neglect of the sector has dragged the entire economy in a mess as huge fiscal deficit plagues the economy. Huge oil imports are also one of the prime reasons behind the weakness in the rupee.

In short, the fortunes of Indian economy are likely to swing in accordance with what happens to the oil prices, something we have no control over. In case the oil prices go up, we will be stuck with twin deficits, weak rupee and inflation. One may expect oil prices, already above psychological barrier of US$ 100 per barrel (versus a range of US$ 20-US$ 40 per barrel during 1980 to 2004), to only correct from here. As per the law of economics, price of a commodity depends on demand supply dynamics. In that context, it is expected that huge investment in oil production in the last decade is likely result in oil production surpassing the demand thus pulling down prices. It is also expected that oil prices may come down significantly if oil demand remains stagnant and if there is substitution by other fuels like natural gas.

However, the argument misses the structural shift that the oil sector is likely to witness in the future. As an article in Business Standard suggests, unlike in the past when oil supplies were sourced from rich regions in West Asia, in the future the sources in the US, Canada, Brazil, Venezuela are likely to contribute significantly to global supplies. The latter being highly capital intensive and oil fields in West Asia facing geo political risks, oil prices are unlikely to witness enough correction to fall back to the levels seen in the past decades from 1980 to 2004.

Irrespective of the demand supply scenario which is difficult to predict, India needs to be self reliant as far as oil requirement is concerned. This is even more important considering the high sensitivity of oil prices to speculations that more often than not take precedence over the fundamentals. But energy security will require a major overhaul in the sector’s policies. This will range right from licensing, framing of contracts to market pricing of the fuels. Over the years, subsidized pricing for different fuels has disincentivized private sector and foreign players to participate. The government needs to bring in policies that make the sector viable and competitive. This will not only make the country self reliant, but also bring the fiscal health of the economy back in order.