Long-term energy outlook needs focus on renewable energy sources

Immediate concern is over-high prices of petrol and diesel that are bound to have inflationary impact on economy

As petroleum products prices soar to record levels, it would be a good time to pause and examine the overall energy scenario for the country. The immediate concern is over-high prices of petrol and diesel that are bound to have an inflationary impact on the economy. The reason for the inordinately high retail rates is not just the hardening of world oil prices, though that is an important factor. The main cause is the spurt in levies on oil products by the central and State governments, as both are desperately trying to mobilise resources at a time when revenue collections have fallen drastically due to the pandemic.

These short-term issues need to be viewed in a larger perspective. By imposing heavy excise duties on petrol and diesel right now, the government may be able to raise more revenues but it will have adverse side-effects. Most importantly, there will be a cascading effect on prices. Inflationary pressures on the economy will be inevitable. In addition, it will put a greater burden on the poorest segment of society at a time when the economy is just getting into revival mode.

A study by the Reserve Bank of India has found that every 10 dollar per barrel rise in oil prices can push inflation higher by 20 to 30 basis points. Currently, prices of the benchmark Brent crude are ruling at around 67 dollars as against an average of about 40 dollars per barrel over the past year. This situation is worsened by the imposition of steep excise duties on oil products as has been done during the past year.

As far as the wider energy outlook is concerned, it is clear that hydrocarbons like oil, gas and coal have a disproportionately high share of the consumption basket. As much as 87 per cent of total fuel consumption comprises of these products. Coal accounts for the highest consumption of about 45 per cent followed by oil and gas with 37 per cent. In the case of coal, the country has large coal reserves but as regards oil and gas, there is heavy dependence on imports. In fact, over 80 per cent of total oil consumption comes from imported crude. The result is the country pays a heavy price in foreign exchange for buying nearly its entire requirement of oil from abroad. The oil bill shoots up when international prices rise and falls when there is a softening trend. The total cost of imports this year will be much lower than previously owing to a crash in prices last year in April and May. As against about 102 billion dollars in 2019-20, oil imports are likely to cost only about 50 billion dollars in 2020-21 owing to the collapse in prices in 2020. The outlook for the next fiscal, on the other hand, is not so bright.

Given this heavy dependence on imports, the government has two options to ensure energy security in the long run. The first is to increase domestic oil production which used to provide up to 70 per cent of the country's needs at one time in the mid 1980s.This was especially so when the Bombay High oilfields were in their heyday. Unfortunately these are aging fields now and even other onshore and offshore oilfields are not yielding as much oil as previously. Successive governments have tried to lure international oil majors here to carry out oil exploration and production but have met with limited success. One of the reasons initially was the lack of sufficient incentives to invest in this highly risky capital intensive sector. Later when better terms and conditions were offered, world prices were not high enough to justify the cost of launching new exploration ventures.

The other option is to take a long-term perspective and give higher priority to renewable energy sources. Hydel, solar, wind and bio-mass energy sources need to be given even more importance given the volatility of the market situation in crude oil and gas. Currently about 35 per cent of the country's installed power generating capacity comes from renewable sources. This needs to be expanded in the long run as the adverse environmental impact of hydrocarbon based fuels remains a concern. It has to be conceded that this government has given a big boost to alternative energy sources. In fact, it has been promoting the development and production of electric vehicles much to the dismay of the entire automobile industry which sees this as a threat to its future. Considerable progress has also been made in the area of solar energy with India now becoming the fifth largest solar energy producer. Tariffs have been reduced to make solar energy much more competitive though it will take a while for it to displace traditional fuel sources. It so far accounts for only about 4 per cent of total power generation in the country and thus needs to be ramped up much more rapidly.

The issue of oil prices therefore is not just a short-term problem. The immediate crisis, of course, needs to be quickly resolved by cutting excise duties that had been raised over the past year on petrol and diesel as a way of mopping up extra resources. Unless this is done, inflation which had reached manageable level of 4.06 per cent in January this year, is bound to spurt and dilute the impact of the economic recovery process. In the long run, however, the government needs to give greater incentives for development of renewable energy sources that will enable the country to reduce its dependence on imported oil and gas.