The Hindu Business Line : Americans feel the energy crunch

The recent price spikes have made oil the No. 1 poll issue in the US today. But given the energy addiction of the Americans, it is impossible to reform the system. This is one country that is not going to compromise when it comes to maintaining the ‘standard of living’ of its broad citizenry, says HARISH DAMODARAN.

In the US, the No. 1 poll issue today — way ahead of Iraq, the housing meltdown, healthcare, terrorism or immigration — is ‘gas’. Both Mr Barack Obama and Ms Hillary Clinton have made fuel prices a major focus of their campaigns in the ongoing Democratic presidential primaries, with the former calling for a windfall tax on profits of oil companies and the latter threatening to invoke the US Anti-Trust Law against the Organisation of the Petroleum Ex porting Countries (OPEC).

Ms Clinton has even proposed to file a complaint at the World Trade Organisation (WTO) challenging the fixing of production quotas by the 12-nation oil cartel.

Well, why not? Since the start of this calendar year, prices of gasoline (petrol) have climbed by over 18 per cent, while diesel has gone up by nearly a quarter. Currently, regular grade gasoline is retailing at $3.6 a gallon (one gallon equals 3.785 litres) or about twice the national average of four years ago, whereas diesel prices have soared almost two-and-a-half times to approach $4.2 a gallon. In other words, as the Clinton campaign puts it plainly, “Americans are being squeezed at the pump like never before.”

Relatively cheaper

In purely statistical terms, there is some truth to the above statement. What it does not highlight, nevertheless, is the fact of how cheap energy really is in the US and continues to be so even after the recent price spikes.

As the Table shows, the current ‘high’ retail price of $3.61 a gallon for gasoline (average for the US as on April 28, inclusive of all taxes) translates into Rs 38.71per litre, taking the Reserve Bank of India’s corresponding reference exchange rate of Rs 40.55-to-the-dollar.

This is lower than the Rs 45-50 plus a litre that consumers in Delhi or Mumbai pay for normal unbranded petrol, without taking into account purchasing power parity (a dollar exchanged and spent in India would ordinarily buy more goods and services than a dollar spent in the US; but in the case of petrol, a dollar can now buy 1.05 litres in the US, as against only 0.90 litres in Delhi and 0.80 litres in Mumbai). Likewise, for diesel, the average on-highway price of $4.15 a gallon works out to Rs 44.45 a litre.

This is higher than the Rs 32 in Delhi and Rs 36 in Mumbai, though not so in purchasing parity terms. The comparison becomes starker as one goes back just five years, when petrol and diesel were retailing in the US at $1.50 a gallon or in the Rs 18-19 a litre range.

What is true for fuel extends to electricity as well. The average retail price of electricity for all ultimate consumers in the US in 2007 was 9.14 cents per unit (kiloWatt-hour), which comes to Rs 3.66 a unit.

The break-up, as per data from the US Energy Information Administration, was 10.64 cents (Rs 4.26) for residential consumers, 9.67 cents (Rs 3.87) for commercial consumers and a mere 6.36 cents (Rs 2.54) for industrial consumers. Contrast this to the Rs 4.50-5 per unit that industries and Rs 4-4.50 that urban households in India usually pay, with peak slabs going up to Rs 8-9 a unit.

And needless to say, one is not even mentioning about quality here. The chances of you and me buying adulterated petrol or diesel in the US is obviously much less than in India, just as the power that is consumed by Indians is of far more unreliable quality. If the costs due to outages, voltage fluctuations, motor burn-outs, maintenance of gensets and inverters, etc., are added, the effective rate that Indians shell out for electricity would probably be double what the American consumer pays, again without considering purchasing power parity (Note: the average median income of all households in the US for 2006 was $48,200; i.e., $4,000 or Rs 1,60,000 per month!).

Car travel preferred

But the other side of all this is that Indians know the ‘value’ of energy much more than the Average Joe or Jane out in the US.

Energy being something that is scarce and costly makes us generally more careful when we take out our bikes, cars or tractors on to the road or to the fields. We also tend to switch off the lights and fans once we go out of the room (one is assuming here an average electricity or fuel consumer, not the minuscule Ritchie Rich segment).

There is no such scarcity value attached to energy in the US. Practically everyone from the janitor to the corporate executive use cars and the cars only get bigger and bigger.

People prefer to stay in the suburbs and come to office by car, and it is not uncommon to see individuals commuting 30-40 miles one way (In 2001, the 107.365 million households in the US owned 202.586 million vehicles or 1.89 vehicles per household; further each vehicle did on an average 21,187 miles or 58.05 miles daily!).

Travelling by car, in fact, works out cheaper than public transport. For example, consider going from Philadelphia to New York, covering a distance of about 100 miles (160 km).

The average fuel economy for a car (on the highway) is 30 miles per gallon, varying from 15-16 miles for an 8-cylinder Ferrari 360 Modena to 40-41 miles in the case of a 4-cylinder Honda Civic or Ford Escort (Rarely does anybody in the US use a 3-cylinder car like Maruti 800 or Alto, leave alone our new 2-cylinder Tata Nano).

Taking 30 miles per gallon (12.75 km/litre), it means the drive from Philadelphia to NY can be comfortably done within four gallons or $14. On the other hand, the lowest train fare for this route (through Amtrak) is $43, while it is about $25 by a Greyhound bus (there are some ethnic Chinese bus operators who offer deals for $15).

And cars are quite affordable: a used Honda Civic that is in good condition and has done below, say 20,000 miles can be had for within $15,000 or four months’ income of the median US household. No wonder, the official statistics reveal that of the 40.25 miles travelled on an average by an American daily, 35.49 miles is done by private vehicles, 0.47 miles by public transport and the rest by walk.

Reform difficult

The long and short of it is that the whole system in the US is designed in a way to discourage public transport and encourage wasteful use of energy — be it excessive car travel or allowing office, apartment or hotel corridors to be lit up 24 hours. Given the kind of energy addiction that the Americans have developed over a period, it is impossible to reform their system.

Any global treaty aimed at combating climate change or setting targets for restricting greenhouse gas emissions will simply not pass muster (incidentally, fossil fuels generate more than 70 per cent of the energy in the US, with non-conventional renewables contributing a measly 2.4 per cent).

For all the awards and encomiums showered on the Al Gores and R.K. Pachauris of the world, there is one country that is not going to compromise one bit when it comes to maintaining the ‘standard of living’ of its broad citizenry.

Only in a scenario where oil touches, say, $200 a barrel for a sustained period can one imagine the world’s biggest economy taking concrete measures beyond glib talk of solar and wind energy, going carbon-neutral, holding RecycleMania competitions in universities, and so on.

Till then, the onus for implementing energy conservation measures and global treaties will ostensibly lie with those who already know the value of the little energy they consume.

(The author, a Senior Assistant Editor with Business Line, was recently a Visiting Fellow at the Centre for the Advanced Study of India, University of Pennsylvania.)