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One would have expected a separate energy budget as a start to addressing energy security issues.
None have spoken about a glaring omission in the Budget regarding 'energy security'. The only item pertaining to petroleum is the addition of section 80-IB(9) withdrawing 'petroleum & natural gas' from the definition of 'mineral oil', thus affecting tax concessions for the exploration of petroleum, and this, when there is imperative need to enhance exploration efforts within the country.
There is, of course, another item affecting petroleum; the cut in excise on automobiles. This would result in more vehicles on the road, increasing crude oil imports! There are reports that the growth in diesel consumption alone will be 10 per cent in 2008-2009, which would exhaust the entire domestic diesel production.
During the past few months, one of the most widely debated topics, both globally and within the country, is the ascending price of crude oil. There have been on-going debates and discussions regarding enhancement in the price of petroleum products vis-à-vis continuing with heavy subsidies. Somehow, these have made no dent on the government.
Crude prices were racing into unprecedented highs on the day of the Budget, entering the uncharted territory beyond $100 to a new record of $102.59 per barrel. The figure increased even more during after-hours trading. Prices have risen $10 in less than a month.
The International Energy Agency said that the previous record was $102.53, after adjusting the figures according to inflation levels. Crude is now trading around $110 a barrel. These are new all-time highs, even in inflation-adjusted terms, beyond the record set in 1980.
OPEC puts the blame on speculators and the weak dollar in addition to the political 'risk' premium, which is hefty, as much as $25 to $50 a barrel. Exxon-Mobil says, "A weak dollar accounts for about a third of the recent record run in oil prices, another third on geopolitical uncertainty and the rest on market speculation."
The ground reality is that OPEC does not or is unable to increase its output, there is rising border tension between Columbia, Ecuador and Venezuela, Iran has not cooled down, and Iraq is still boiling. The dollar is likely to fall more as the Fed intends to cut interest rates further, and this could push up oil prices even higher. Goldman Sachs says $200 a barrel could be a reality in the not-too-distant future in case of a 'major disruption'. Disruptions can occur in any part of the oil-producing world.
Petroleum is not a renewable resource and will get exhausted rather sooner than later. World oil production peaking will therefore occur soon, which will keep oil prices at a high. The use of petroleum is all-encompassing throughout the world. It is a strategic commodity subject to market forces.
We are now in a situation where high oil prices have come to stay, which will have very serious repercussions on our economy. High oil prices affect India's defence preparedness because there is yet no substitute for crude oil or petroleum products, which are fluid, easily transportable and simple to store as strategic reserves. There are heavy costs and a long gestation period for transitioning to alternate sources of efficient energy and for finding a viable fluid to substitute petroleum.
The world might not be running out of petroleum but it certainly is running out of time to prepare itself for the day when petroleum demand exceeds supply or when the world is unable to find new reserves to replace its consumption.
Preparation for transition is an elaborate exercise -- socially, politically, technologically and financially. The issue of energy security does not form part of an election speech or rhetoric because the masses, who vote our politicians to power, are not alive to the serious repercussions of sustained high crude oil prices.
The draft report of the expert committee of the Planning Commission on integrated energy policy promotes rapid expansion of a bio-diesel crop, jatropha. The plan is to plant, by 2012, some 14 million hectares on what it has classified as 'wasteland' but reports are already coming in of companies wanting to grow jatropha, dispossessing farmers of fertile land because of heavy concessions given by the government for jatropha planting.
There is glib talk of ethanol as an additive without studying whether EROEI (energy returned on energy invested) is positive or its ill-effects on food prices, land value or environment. When we substitute an energy source with a positive EROEI -- oil, for instance -- with another energy source with a negative EROEI, such as ethanol, there is a loss of gross energy produced.
According to current data, the returns on extracting oil from tar sands works out to roughly three barrels of oil for every two consumed, representing an EROEI of about 1.5. The figures of EROEI in the US for non-renewables are all positive, while for renewables such as ethanol (corn), it is just 0.78 and for bio-diesel (soybeans), it is negative at minus 0.79.
These issues need hefty allocation of funds just to carry out preliminary studies, leave alone implementation of the recommendations. One would have expected a separate energy budget as a start for addressing energy security issues.
Contrast Finance Minister P Chidambaram's approach to that of the Labour government in London. In his maiden budget, Alistair Darling, the Chancellor of the Exchequer, announced significant tax increases from new higher rates of vehicle excise duty for 'gas guzzlers' and an abolition of lower duty rates for biofuels. As a package of eco-friendly measures, he revealed that from 2010, owners of the most polluting cars will pay £950 in road tax in the year of purchase, double the rate for subsequent years, while biofuel will lose the 20p per litre subsidy it currently enjoys.
These are crucial issues which the Budget should have addressed.
The writer is former chairman, Oil India Ltd
