The Hindu Business Line : Inclusive growth runs into an oil slick

OECD’s World Energy Outlook predicts a bleak global energy scenario. The global demand for oil is projected to reach 116 million barrels per day by 2030. Even as oil prices rise to unprecedented levels, the Government is reluctant to take the politically risky decision of raising retail prices. This could hurt the Government’s long-term objective of bringing about growth with equality, says G. SRINIVASAN.

The wild gyrations in global oil prices have created upheavals in economies globally. With crude pushing beyond $98 a barrel on Wednesday, the developed countries, in general, and the developing ones, in particular, remain jittery over their energy security.

Dire predictions about world oil producers from West Asia and the Organisation of Petroleum Exporting Countries (OPEC) holding the world to ransom have not been belied; rather, they now appear to be impacting regions with such severity that only a few countries can emerge unscathed or without permanent damage to their fisc.

The Paris-based inter-governmental think-tank of the 30 rich industrial countries, the International Energy Agency (IEA) of the Organisation for Economic Cooperation and Development (OECD) has come out with its flagship publication World Energy Outlook today, bearing out the worst fears about oil prices zooming relentlessly in the coming years, if the necessary investment is not forthcoming from the OPEC to augment production.

Supply crunch

World oil resources are judged to be sufficient to meet the projected growth in demand till 2030, with output becoming more concentrated in the OPEC. The region’s collective output of conventional crude oil, natural gas liquids and non-conventional oil (mainly gas-to-liquids) is projected to climb from 36 million barrels per day (mb/d) in 2006 to 46 mb/d in 2015 and 61 mb/d in 2030. As a result, OPEC’s share of world oil supply jumps from 42 per cent now to 52 per cent by the end of the projection period.

A disturbing fact is that although new capacity additions from green-field projects are likely to increase over the next five years, it is quite uncertain whether they are sufficient to compensate for the decline in output from existing fields and if they can keep pace with the projected increase in demand. A supply-side crunch in the period to 2015, involving an abrupt escalation in oil pries, cannot be ruled out.

Global oil demand is projected to reach 116 mb/d in 2030. Fast-growing energy demand for transport is the main driver since today’s vehicle population of 900 million cars and trucks on the world’s roads is likely to exceed 2.1 billion by 2030.

China and India

Interestingly, some 42 per cent of the increase in global oil demand by 2030 will emanate from China and India, the main focus of this year IEA’s report. The combined oil consumption of China and India could rise from 9.3 mb/d in 2005 to 23.1 mb/d in 2030. Almost two-thirds of this spurt comes from the transport sector. The total number of light-duty vehicles on the road is projected to jump from about 22 million in 2005 to more than 200 million in 2030 in China and from 11 million to 115 million in India.

The rising demand and limited domestic resources would lead to both countries importing more oil. Their combined oil imports might surge from 5.4 mb/d in 2006 to 19.1 mb/d in 2030 — more than today’s imports of Japan and the US together. While both these Asian countries are scouting for acquisition of additional oil acreage abroad to cope with their energy security over and above stepping up domestic oil production through better recovery techniques, this is nowhere near their goal of meeting their full oil needs.

“China and India are increasingly aware that overseas acquisitions of oil assets will do little to help protect them from the effects of supply emergencies,” says IEA cryptically, implying the underlying threats of supply disruptions. This is apart from the risks of pouring capital expenditure into far-flung oil-fields by resource-scarce developing countries such as India, which needs to focus on its development programmes of building social infrastructure.

A disconcerting reality is that before 2025, the IEA foresees India overtaking Japan to become the world’s third largest net importer of oil, after the US and China. Net oil imports will grow steadily to 6 mb/d in 2030, as proven reserves of indigenous oil are small. The share of imports in oil demand will climb to a staggering 90 per cent in 2030. However, the scenario is not entirely bleak, as the IEA gives due credit to India’s importance as a major exporter of refined oil products which would definitely grow, provided the requisite investments are made.

The IEA reckons that to maintain growth in production capacity, the oil industry worldwide needs to invest $5.4 trillion between 2006 and 2030, mostly for upstream development and mainly to replace capacity that will become obsolete over the projection span.

Ironically, any underinvestment in the exporting countries, particularly from OPEC, could drive up prices in the longer term, a development that seems to be happening now. The report does not underplay the ominous significance of the increasing concentration of the world’s remaining oil reserves in a small group of countries — notably the West Asian members of OPEC and Russia. This would escalate their market dominance and might jeopardise the required rate of investment in production capacity.

“The greater the increase in the call on oil and gas from these regions, the more likely it will be that they will seek to extract a higher rent from their exports and impose higher prices in the longer term by deferring investment and constraining production,” the IEA warns, adding that higher prices would be particularly painful for some developing countries still seeking to protect their consumers through subsidies.

India’s predicament

As oil prices go through the roof, India’s situation is becoming difficult. Despite global oil prices rising, India is still averse to revising the retail price of oil and its products but keen on compensating oil marketing companies in a quixotic burden-sharing formula involving downstream companies and flotation of oil bonds, the redemption of which would devolve in a future date on the exchequer.

The UPA government seems reluctant to take hard economic decisions, lest its fractured mandate further alienates its allies, bringing down the government or marring its electoral prospects.

The Hobson’s choice before the Government is paralysing policy decisions and worsening the vulnerability on the slippery slope of oil-induced danger ahead. The Government might take comfort from the fact that the demon of inflation has been tamed. But the escalating fuel costs in the consumer price index on household expenditure and industry budgets and external balances, particularly for heavy oil-importing countries like India, cannot be dismissed lightly.

The price of profligacy and imprudence will haunt the authorities before long and put paid to their hope of ensuring a high growth trajectory for the Indian economy and, with that, to the egalitarian ideals of inclusive growth that the Eleventh Plan loftily sets store by or the aam aadmi mantra of the principal member of the ruling coalition, the Congress.