Energy Security – Time for Plan B?

The recent foreign policy debates are largely centered around our future energy needs. Frenetic economic diplomacy to secure nuclear power generation oil and gas contracts, and laying pipelines on the east as well as west to transport fossil fuels are certainly of value in the short and medium term. Long-term supply contracts and investments in exploration in oil-rich countries will give us some leverage. But we need to plan for the future with clarity in an integrated manner.

Let us look at the bigger picture to understand the threats to our energy security. A recent book – “Plan B 2.0” by Lester Brown – paints a grim picture of the global situation in the next hundred years. Brown is not an evangelist with apocalyptic vision. He is an optimist who recognizes the many opportunities to shape a better and more secure future in the next century.

Brown points out that we are very close to peak oil production, and, “indeed, when historians write about this period in history, they may well distinguish between before peak oil (BPO) and after peak oil (APO)”. He analyses oil prospects in three different ways. First, anticipate future production trends using the reserves/production relationship, a method pioneered by King Hubbert. This analysis suggests that nearly 95% of all the oil in the world has already been discovered. Major global companies – Shell, Chevran Texaco, Conoco-Phillips – reported that their 2004 production greatly exceeded new discoveries. Geologist Walter Youngquist notes that in 2004 the world produced 30.5 billion barrels of oil, but discovered only 7.5 billion barrels of new oil.

The second approach separates the world’s principal oil-producing countries into two groups – those where production is falling and those where it is still rising. Of the 23 leading oil producers, output appears to have peaked in 15, and is still rising in eight. The post-peak countries include the US, Venezuela, UK and Norway. US oil production declined by 44% since 1970, from 9.6 mbd to 5.4 mbd, and Venezuela’s production declined by 30%. The eight pre-peak countries are Saudi Arabia, Russia, Canada, Kazakhstan, Alegeria, Angola, China and Mexico. Sadad al-Husseini notes that annual world oil demand is rising by 2 mbd. In addition, the annual decline in production in existing fields is 4.4 mbd. In other worlds, new production must increase by 6.4 mbd every year. This is virtually impossible. While new finds are declining, there is vast amount of oil is stored in tar sands in Canada and oil shales in Venezuela. Only a quarter of it can be recovered, but at great environmental cost.

The third approach is to examine the actions of major oil companies themselves. Leading oil companies are investing heavily in buying up their own stocks. Mobil ($ 10 b) and Chevran Taxaco ($2.5b) spent vast amounts to buy back stock. As Brown says, “With little new oil to be discovered and world oil demand growing fast, companies appear to be realizing that their reserves will become even more valuable in the future”. Also, there is no substantial increase in exploration and development even after oil prices shot beyond $ 50 a barrel.

All these approaches lead to one inescapable conclusion. We must plan for after peak oil (APO). For India, there are five options. First, nuclear fuel, with all the caveats and limitations, offers significant opportunity for power generation. Our current 3% can, and should be enhanced to about 15-20% in the next decade. Second, we have significant coal reserves. But our coal is of poor quality (calorific value averaging 2500 Cal per kg), and is highly polluting with vast ash content (often exceeding 40%). On top of it, our nationalized coal companies have become dens of corruption and incompetence. In most coal belts, a vast network of mafia operates, and a whole new political economy grew around mining. Dhanbad coal mafia is a classic example, but it represents only the tip of the iceberg. Coal mining needs to be opened up to competition and private investment, and ruthless action is needed to eliminate mafia links and criminal influence.

Third, we need to harness all renewable sources of wind, tidal energy and solar power. These forms of power are self-limiting, and can at best be tapped in small quantities at community level, and will work best in conjunction with centralized power grid.

The fourth is generation of biofuels utilizing our vast agricultural land, which at 140 mha accounts for 12% global farm land. In a fundamental sense, agriculture should meet most future energy needs, and supply fungible, easy-to-use biofuels. This will put pressure on food supplies. Plentiful, cheap oil distorted world economy over the past 50 years. In 1970, 1.49 bushels of wheat could buy 1.79 barrels of oil. Since then, this ratio increased from 1 to 13, meaning that now we need to sell 13 bushels of wheat to buy one barrel of oil. As food and fuel compete for land, the need for biofuel production will raise food prices. That may actually be good news for a country like India, where 55% of the people living on agriculture enjoy only 21% of GDP. But massive investments, R & D, and planning are required to tap our vast potential. Finally, India needs to look at demand side management. Increased energy efficiency, better public transport, and imaginative urban planning are vital to reduce demand.

Clearly, integrated energy management is the key to our energy security. Segmented approach – coal, power, oil and gas, non-conventional energy, agriculture – can no longer yield dividend. Will the government act on Plan B quickly?

Growing Agrarian Crisis

As the Finance Minister gets ready to present the budget for next year, the sector which causes him the greatest anxiety must be agriculture. The past year has been relatively good in terms of rain fall and the Rabi yields should be encouraging. But in general, for over a decade now agricultural growth has been sluggish, stuck at about 2%. And there are four good reasons to be concerned about low agricultural growth rates.

First, sustained high GDP growth rates demand doubling of agricultural growth from 2% to 4% per annum. Second, unless agriculture yields better incomes for the rural population, domestic demand for manufactured goods and services is bound to taper off, adversely affecting growth in secondary and tertiary sectors. Third, the share of agriculture in our GDP is rapidly declining. Agriculture accounted for 31.3% of GDP in 1991-92 but by 2003-04 this share fell to 22.1%. This relative decline is leading to misery and a sense of deprivation in rural India. Finally, nearly 60 percent of population still depends on agriculture directly or indirectly, and jobs in non-farm sector are not created on the required scale to absorb the agricultural workers and new entrants to labour pool.

If these challenges are not addressed swiftly and aggressively, there could be serious social strife and political volatility. Already the evidence of rural distress is mounting, with endless news of hunger, farmer suicides and large scale migration to urban areas in search of livelihood. The spread of left wing extremism across large tracts of the country over the past decade is one more manifestation of growing despair and anger in rural India. The numbers are revealing. The income per capita of over 55 percent of Indians dependent on agriculture is only 23% of the rest of the population. Such deprivation of the vast majority of people in a poor country has debilitating consequences to our economy and polity.

What can the FM do to stimulate agriculture and rural economy? Protection from cheap imports is certainly necessary. But in an increasingly globalized world our consumers will not accept higher prices of edible oil and pulses when cheaper imports are possible. Cotton farmers can be given added protection by higher tariffs. The past few years have seen over 100 lakh bales of cotton import, which exceeds the preceding 30 years’ cumulative imports! But with the end of the WTO quota regime, India must aggressively expand its market share in garment sector. Therefore, cotton prices cannot be allowed to rise beyond a point, if our garments are to be globally competitive.

A lot of needless subsidies have only sucked up precious resources (urea) or led to growing corruption without benefiting the farmer or consumer (food subsidies and cotton procurement). Most of these subsidies can be rationalized or ended, and those resources can be channelized into capital in agriculture sector to boost productivity. Credit expansion is already a stated policy goal, but it yielded mixed results. Excessive state control of credit cooperatives, extortion of predatory public officials, poor land records, weak credit infrastructure, and sluggish demand for agricultural products limit the credit expansion. The state extension machinery is virtually dysfunctional, and the corruption and incompetence of public agencies is resulting in short supply of seeds and sale of substandard inputs. Effective institutional mechanisms must be evolved to address all these issues – subsidies, credit, extention and inputs.

In addition, focus on three areas is critical for the future of agriculture. First, agricultural markets need to be reformed and opened up. Regulated markets enjoy a monopoly, and corruption and incompetetence are rampant. While the mandis function tolerably well in same states, in other states they are a source of political patronage and corruption. In case of vegetables, fruits and fish, the farmers are entirely at the mercy of local mafias and extortionary middle-men. Years ago, when Andhra fish farmers wanted to enter Kolkata markets, they had to submit to extortionary demands of local mafia. Only timely intervention of the then chief minister Mr Jyoti Basu helped both the farmers and the consumers. Agricultural marketing is a state subject and strong incentives are needed to nudge states to quickly reform the markets.

Second, value addition to agricultural produce is the key to the future. Tomatos sold at Rs 16 per kg a month ago in Andhra Pradesh, and they now sell at Re 1 a kg! The story on onion price fluctuations is too well known to bear repetition. These price fluctuations in case of perishable commodities is very common. While a few lucky farmers may benefit from high prices, most are driven to despair, and often the low price does not cover even the costs of harvesting. Agro processing on a massive scale will stabilize process, add value, raise incomes, assure markets, boost local economy, and create new jobs. Budgetary support for infrastructure and investment, and policy support to boost agro-processing are vital to revive agriculture.

Third, millions of rural youth are both unemployed and unemployable. Declining agriculture cannot give them livelihood, and industry cannot absorb them. A massive programme to promote skills and boost investment in small and medium enterprises in rural areas is essential for job creation.

For years, budget pronouncements have been long a rhetoric and short on action when dealing with agricultural revival. Will the 2006-07 budget be different?