The Hindu Business Line : A future without oil

Increasing the fuel efficiency of vehicles and boosting the use of alternative fuels are some of the options in the effort to reduce dependence on oil. Some auto and energy companies are experimenting with biofuels, made from renewable resources such as agricultural crops or waste.

THE price of oil has gone up from $10 a barrel (six years ago) to more than $50 today. Oil importing countries like India are affected while the oil exporters are reaping benefits.But why are oil prices rising? On the demand side, it is due to an increase in incomes, especially in China and India. Since 2001, China has accounted for a third of the rise in global oil consumption.

On the supply side, Saudi Arabia and Kuwait, othermajor OPEC producers, are not able to increase production as they have run out of excess capacity. (It takes years and massive investments to build production, especially refining, capacity in oil).

The price of oil is largely controlled by OPEC, a cartel of major oil producing countries, by allotting production quotas to member countries. So, whenever oil prices go up, it is attributed to OPEC.

However, OPEC does not have full control over global oil prices. Major oil producing nations like Russia and Mexico are not members of this grouping. Even OPEC members sometimes ignore their their quotas and floodthe market. That way, small players are able to sell larger quantities at high prices.

The governments of countries involved in trading try to influence the price and consumption of oil by imposing taxes, subsidies, regulations, and alternative energy and environment policies.

What are the implications of this rising trend in oil prices? The 1970s oil shocks prompted the world to switch from petroleum to other fuels for power generation. Today, the automobile sector needs to reduce its dependence on oil.

One idea is to reduce the use of cars in urban areas. (Shanghai's economic boom in the recent years has been accompanied by an annual rise of 15 per cent in the number of cars).

Trains, subways and car-pooling schemes can be devised. Increasing fuel efficiency and boosting the use of alternative fuels are other options.

What is happening in the US? According to The Economist, the average fuel economy of the new American vehicles is close to a 20-year low. However, some analysts think that higher petrol prices in America would drive home the point that efficiency matters. This would boost innovations such as hybrid cars.

Pioneered by Toyota, these cars are now slowly making their way into the market. They use conventional petrol engines, but improve fuel economy by using a small electric motor at low speeds to capture the energy generated in braking.

Some auto and energy companies are experimenting with biofuels, made from renewable resources such as agricultural crops or waste. They are eco-friendly and can be used inconventional engines, by blending with petrol.

Another alternative is natural ga,s which is clean andbooststhe potency of the diesel fuel.

Electricity powered by combining hydrogen fuel with fuel-cell engines may be used to run cars. This combination will produce no emissions to harm the environment. General Motors plans to implement this technology in one million cars by 2010. General Electric and others are also investing in fuel-cells.

These moves may not, however, lead to any significant reduction in oil consumption, unless governments give subsidies that favour biofuels.

The International Energy Agency says that the OECD's biofuel consumption will rise 25-fold by 2030. However,it will account for only 4 per cent of worldwide transport-fuel consumption.

So, the world is bracing up to cope with the rising oil prices. As someone put it: "The stone age ended long before there was any shortage of stones. Similarly, the oil age may come to an end even before the world runs out of oil."

(The author, a Professor of Economics at IIM Calcutta is now a Visiting Professor of Economics at University of Rochester, US.)

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