The Hindu Business Line : Tweaking the US' oil endgame plan

Drawing from a recent US study, S. Venkitaramanan relates how the US will "definitely apply its energies to the task of eliminating its dependence on imported oil," and that the rest of the world, India and China in particular, will inevitably follow suit. But apart from sporadic efforts to encourage energy conservation, India has no holistic energy policy and vision on alternative sources, when with its rich intellectual powers, it can do better than what the US has tried.

THE unfortunate sequence of events in the aftermath of Hurricane Katrina in the US has brought into focus the vulnerability of a modern economy to energy supply, particularly because New Orleans is a port that is linked with imports and exports of oil products.

Further, the disruptions following the recent demise of King Fahd of Saudi Arabia also showed that the modern economy is a hostage to energy supply.

While it is true that this has been partly captured in the hefty premia on crude prices, it is also true that economies vitally dependent on energy can grind to a halt if a misguided terrorist explodes bombs on a vital oil/gas pipeline in distant countries.

All these developments have led various analysts and policy-makers to think deeply of alternatives to oil and of how to bring about a transformation of the energy economy of various countries.

While it is true that the US resident, Mr George W. Bush's latest Energy Bill does not do anything drastic, it is also true that various economists in the US have been quite concerned about this issue.

There have also been lively discussions on the subject of alternatives to oil in India.

There has been a spate of articles in media on bio-fuels in recent times. Incidentally, the first citizen of India, Mr Abdul Kalam, himself has demonstrated the importance of energy conservation, which is a vital aspect of exploration of options in energy.

In this connection, Mr Fareed Zakeria, the distinguished columnist, recently wrote a provocative article in Newsweek of August 19, 2005, on how to escape the oil trap.

He pointed out the vulnerabilities that dependence on oil brings, the volatility of its supplies, the exposure to terrorists and other related risks.

He drew our attention to a powerful study "Winning the oil endgame" by energy expert, Amory Lovins, which draws up a roadmap for reducing oil dependence.

I was fascinated by the study, available at oilendgame.com. While it primarily addresses issues relevant to the US economy, its strategic concerns and economic patterns, as well as its conclusions are indeed applicable to the rest of the world, with suitable modifications.

The study is an interesting and robust attempt to draw on the existing technological advances to improve energy efficiency and adapt alternative fuel sources, such as fuel cells and bio-fuels through various methods, such as, what it calls "fee-bates" (fees and rebates) to encourage desirable patterns of energy use.

It estimates that automobile-makers in the US will need to invest $70 billion to make advanced technology vehicles that are fuel-efficient. Federal loan guarantees are visualised to enable the funding.

Similar policies will extend credit facilities for airlines investing in energy-efficient planes. A mix of incentives, taxes and subsidies to help the development of the bio-fuels industry is also envisaged. The endgame is to help the US eliminate its utter dependence on imports from sensitive regions of the world.

The report estimates that for the US, investing $180 billion over the next decade will eliminate its oil dependence and help revitalise strategic industries. As a result, the US is expected to save $130 billion gross ($70 billion net) every year. This saving, equivalent to a large tax cut, can replace today's $10 billion a month import of oil with reinvestment in US economy of the amount, and $40 billion would pay for bio-fuels. The fuel-cell industry will also be developed as part of the plan.

The report has the implicit support of the Pentagon. George Shultz, a former Secretary of the US Treasury and a distinguished economist, has written a foreword to the study, in which he says, "When as a Secretary of the Treasury, I reviewed proposals for alternatives for oil from the time of the first big oil crisis (in the 1970s). Pie in the sky I thought, but now the situation is different. We can, as the study shows vividly, pursue with the oilendgame.

"The US has demonstrated more than once before that when as a nation it applies its mind to a serious problem at hand, it can solve it, by hook or crook. It did so when it took up the Manhattan Project to develop the atom bomb. It did so in the Cold War.

"It can still win the oil game and find itself home and free provided it applies its tremendous technological and other resources to the systematic attempt detailed in the report to involving industry academics and the Government in the exercise of changing lifestyles, transportation policy, and energy use, in general — in a way alter the whole patterns of life.

"Given the global imperatives of security, it seems the US will definitely apply its energies to the task of eliminating its dependence on imported oil."

What does this imply for the rest of the world? By a perverse logic, it might make life easier for the rest of the world for some time as the pressure of US demand will be less. But the day of reckoning for the rest of us will also be sooner than later.

It is inevitable that what the US proposes to do today, the rest of the world, India and China in particular, will have to do sooner or later. This applies not only to the emulation of wasteful energy use, such as the indiscriminate use of automobiles, but also to the reverse — the substitution of gasoline guzzlers by more efficient vehicles, like the hybrid cars so successfully introduced by Toyota in recent years.

So far as India is concerned, what the report on the oilendgame indicates is a signal to our policy-planners to take seriously the question of ensuring less dependence on oil in India's future.

An energy policy is sadly missing in our Government's overall approach to petroleum pricing. While there are sporadic efforts to encourage energy conservation, there is no holistic approach to the whole energy issue and what needs to be done in respect of alternative sources.

Above all, the question is one of reversing our downright unwise policies of encouraging overuse of petro-products through our "cheap" fuel emphasis.

This is an insight that will follow once Indian experts assess the high b.o.p and security burden that India's increasing thirst for oil and gas will impose on the economy. Our tax policies should encourage conservation and not discourage it as present populist trends of tax cuts on petro-products indicate.

There has also to be a conscious study of the role of our transportation industry — of how far it can go to make appropriate arrangements for introducing fuel-efficient engines. Substitution of lighter composites for currently used heavy metals in automobile engines/bodies can also help increase fuel efficiency.

Similar is the needed thrust to encourage the development of fuel cells. This would, in turn, require a whole set of infrastructural facilities for keeping fuel cell vehicles supplied with what they need.

The exercise calls for a dedicated effort on the part of automobile industry as well as the tax experts and other economists to work together to arrive at a suitable incentive and disincentive structure to help develop the fuel cell based automobile industry.

All this seems to indicate that we need to set up a competent panel to study our energy policies and prospects in an integrated fashion. Such a panel has to have a re-look at the role that oil plays in the energy scenario. It also has to look at alternative sources of energy, including bio-fuels, coal, nuclear and fuel cells.

The hydrogen economy may not be as far away as some oil optimists feel. The panel will have to study the costs and challenges that a fuel cell economy will bring.

This is a challenge not only to Government but also to oil companies. Their future may be very different from their past. They may well have to become energy companies rather than mere petroleum entities. But what is important for the panel is to attempt a market-driven solution that will enable an orderly transition of India's economy from over-dependence on oil to relative independence.

Independence has its costs, in terms of necessary investments and changes in lifestyle.

But these costs are well worth incurring considering the alternative — the costs of dependence on a source of energy whose supplies are precarious and liable to disruption at short, or no, notice. All this requires a great deal of coordinated work by technologists, economists, bureaucrats and other policy-makers.

One hopes that what the US has tried in its report on oilendgame can be accomplished even better by the application of soft intellectual power that India is richly endowed with.

Surely, we need to draw on US oilendgame, but we need also to avoid the errors that have marked the US' stumbling march into the 21st Century's energy chaos.

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