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Shifting the Focus for Oil Security

India has historically relied on supply side interventions to address oil security. These interventions have not led to any major increase in the availability of crude oil for the country. The time is thus right to intervene from the demand side by introducing, among other things, fuel economy standards for vehicles and efficient pricing and taxation policies to alter travel demand as a different strategy to address oil security, which should be taken as a complement to the supply side interventions.

Perspectives

Shifting the Focusfor Oil Security

India has historically relied on supply side interventions to address oil security. These interventions have not led to any major increase in the availability of crude oil for the country. The time is thus right to intervene from the demand side by introducing, among other things, fuel economy standards for vehicles and efficient pricing and taxation policies to alter travel demand as a different strategy to address oil security, which should be taken as a complement to

the supply side interventions.

CHIRAG SHAH

I
ndia’s integrated energy policy (IEP), 2006 could not have come at a better time. The policy raises concerns over energy security. “Energy security has become a growing concern because India’s energy needs are growing with rising income levels and a growing population. Our dependence on imported energy has increased. Up from 17.85 per cent of total primary commercial energy supply (TPCES) in 1991, imports accounted for 30 per cent of our TPCES in 2004-05. What is of particular concern is that imports comprise largely of oil…,” says the policy. Clearly, oil security poses a significant challenge to the country. Close to 78 per cent of our crude oil requirement is met through imports and according to the International Energy Agency (IEA) we will be import dependent to the extent of 94 per cent by 2030 [Ramsay 2003]. The high oil price scenario which prevailed during 2004 and 2005, continued to prevail up to mid-September 2006. The price of the Indian basket of crude oil reached its highest of $75.20/bbl on the August 8, 2006. For instance such has been the impact of a sustained price rise that in 2005-06, the cost of crude imports for India had increased by about 50 per cent over 2004-05. In 2005-06, the prices of crude oil (Indian basket) have increased by 138 per cent, petrol by 142 per cent, diesel by 175 per cent kerosene by 192 per cent and liquid petroleum gas (LPG) by 148 per cent over March 2002 [GoI 2006a].

The persistent high oil price regime is making net importers like us more oil insecure. This is, among others, largely fuelled by the consistent demand growth for crude oil, the world over and in this region specifically. For instance, China and India contributed 35 per cent to incremental oil consumption between 1990 and 2003, even though the two countries produced only 15 per cent of the world output over the period [IMF 2005]. Such is the impact of these two countries that the forthcoming IEA World Energy Outlook 2007 is focusing on China and India to understand how fast demand in these dynamic economies will rise, how will it be met, and what impact will their energy choices have on the rest of the world?

The future looks particularly ominous as far as oil security for India is concerned, given the expected increase in the economic activity, the resultant demand for vehicles, and fuels (with meagre domestic resources). How are we then addressing oil security, given that every other country is also trying to achieve the same? Is addressing oil security a zero sum game, for resources are finite? To begin with we will critically review the efforts of the government to address oil security and then we will suggest a different but a complementary approach for addressing oil security.

Supply Side Reign

Our interventions have been on the supply side. The importance of demand side measures has been acknowledged as evident in the auto fuel policy and the recent IEP. However, we have failed to translate these into practice. Our stand is still not clear, evident from the stark difference between the Tenth Five-Year Plan and the Approach Paper [GoI 2006b] to the Eleventh Five-Year Plan (hereafter Approach Paper). The Tenth Plan, for instance, did accept that the emphasis has always been on supply side management, and hence demand side management needs to be pursued. It comprehensively dealt with the issue of oil security, listed the concerns and ways to address the same. Regrettably, the Approach Paper has subsumed the crucial issue of oil security (which merits dedicated focus) in a broader approach of energy security. It calls for incentivising rational use of energy across all sectors including agriculture, industry, commerce, domestic, personal transport, public transport and haulage, falling short of explicit ways to deal with the ever increasing oil insecurity.

To address oil security, interventions have to be made from both the supply and demand side. Both the interventions are complements rather than supplements. While the former entails measures like acceleration of exploration efforts, especially in deep offshore and frontier areas, diversification of sources, improved oil recovery/enhanced oil recovery (IOR/ EOR), acquiring equity oil and gas abroad, building strategic storage of crude oil and increasing usage of bio fuels/ alternate fuels, the demand side relies on intervention through taxation policies to reduce the demand for fuels, alter current travel patterns, improving efficiency of vehicles, among others [IEA 2005].

Intensive Exploration

Exploration has been a top most priority on the government agenda over the last four decades. For instance, the Third Plan talked about an “intensified programme of mineral exploration and development”. Similarly, the Seventh Plan stated the “need for intensifying exploration as well as for extending exploratory activities to inadequately explored and unexplored basins”. The Ninth Plan envisaged acceleration of exploration efforts, and the Tenth Plan pointed out that “the thrust area is acceleration of exploration efforts especially in deep offshore and frontier areas”. The country largely remains unexplored. Whatever be the shortcomings or implementation strategy, only on 33 per cent of the sedimentary area, exploration has been initiated, 18 per cent of the area is moderately to well explored, 19 per cent poorly explored and 30 per cent unexplored [GoI 2005a]. Analysts have pointed out [Rao 2005] that even in fairly explored areas drilling intensity is very low, averaging only 12 wells per 10,000 sq km. No wonder the IEP holds that there has been no significant step up in crude oil reserves during the last decade, in spite of large investments in exploration activities. Its call for not relying on the possibility of finding oil domestically should be taken as the writing on the wall. Our proved reserves data shows that supply side interventions have not resulted in any significant increase in the availability of oil. Proved reserves have increased from 3.8 thousand million barrels at the end of 1985, to around 5.9 thousand million barrels at the end of 2005 [British Petroleum 2006].

The current producing fields also are no different. For instance, the average recovery factor from the producing fields of the Oil and Natural Gas Corporation (ONGC) has remained stagnant in the range of about 28 per cent over the last few years, much lower by international standards. Efforts are now being made through secondary recovery methods like the IOR/EOR, so that these can be improved to 35 per cent over a 10-year period and to about 40 per cent over 15-20 years [GoI 2006c]. Though necessary, these strategies are short-term measures for a problem which essentially is a long run one, moreover these strategies are also not easy to implement. EOR schemes [Mehta 2005] are complex, energy intensive, and also expensive. But if implemented appropriately, they can cut unit costs, lower the decline in production from mature fields from the expected 15 to 4 per cent per annum, and increase the rate of oil recovery by 15 to 20 per cent. The new exploration and licensing policy (NELP) introduced in 1997 is expected to alter the Indian exploration scenario. It has its share of impact, though it is too early to brand it a success. Moreover, it has to be remembered that no international majors have shown interest in the NELP blocks.

Similarly, the country’s new found interest in acquiring equity oil and gas abroad, though conceptually and strategically sound, is fraught with significant risks. Apprehensions have already been raised on how the overseas investment of ONGC Videsh Limited might not be of the right kind; they usually buy a minority stake, among others [GoI 2005b]. The IEP cautions when it says that obtaining equity oil abroad does not particularly increase oil security against supply risk. The political risk of disruption of equity oil through embargos or nationalisation, etc, would be similar to risk entailed in oil import from the same country. It goes on to add that this strategy is nothing but a “commercial investment decision”. The recent spate of nationalisation of assets across many countries should be reason enough to check the policy.

Strategic Folly?

In a move to further bolster the supply side, the Indian Cabinet approved setting up strategic storages of crude oil on January 2004, and the funding was approved in January 2006. In principle, a decision has been taken to construct 15 million tonnes strategic storages in phases; with 5 million tonnes strategic storage of crude oil at an estimated cost of Rs 11,267 crore over nine years in the first stage. It will take six years to build the storage, and three years to actually fill the same and all this for securing a minuscule per cent of our annual crude oil consumption. Currently, though we do not have a strategic storage of crude oil, what we have is crude oil and major product holding capacity with the oil companies, which provide a cover of around 83 days. We are building the reserves as this is expected to fall to a level much below the internationally accepted 90-day period. Based on current estimates, we are building reserves for just 15 days (the rest would be holding capacity of the companies), so that we are able to meet the international practice of 90 days’ cover of net imports. The whole exercise thus seems questionable. The Planning Commission had already opined that we need to review the justification for setting up strategic crude oil storage to provide an additional 15 days coverage.

We need to understand that strategic storage of crude oil exhibits characteristics of public goods. For example, the world can enjoy the benefits of the US releasing its strategic stock of crude oil, given that the oil market is highly integrated. Moreover, care has to be taken on the method of financing the reserves, for the country should in no way subsidise vehicle owners. Other country experiences caution us on how releasing crude oil from strategic reserves is very difficult. For example, when should a country release its strategic stock of crude oil, what and when would be the trigger points? These and other related operational issues perhaps explain why the IEA and United States Strategic Petroleum Reserve (USSPR) have released stocks only twice. Taylor and Doren (2005) conclude that instead of filling up the USSPR and expanding the capacity to one billion barrels or more, the federal government should cut its losses by selling the oil and shut the programme.

Another supply side intervention of implementing bio-fuels/alternatives poses significant challenges [Roychowdhury et al 2006]. The bio-fuel strategy of India is biased in favour of the farm lobby. Biofuel implementation is a zero sum game. Either we can appease the farm lobby or gain oil security, never both. Pricing ethanol and bio-diesel, adequate supplies, the regulatory structure, among others are just few of the many challenges. Again implementing CNG/LPG is a step in the right direction; it however needs a clear strategy, given that we are deficit in both these gaseous fuels. Since gas reserves are less concentrated than crude oil, security concerns would be minimal even with the expansion of markets. While many cities have already implemented a gaseous fuel strategy, the growth has stagnated. It is only if automobile manufacturers intervene, can we expect gaseous fuels to replace conventional fuels.

Diversification of Sources

The country for quite sometime has fancied the idea of diversifying crude oil sources. It is difficult to comprehend how this can be achieved. A look at the distribution of proved reserves over the last two decades shows that west Asia has only increased its share from 56 per cent to 62 per cent (Figure 1). Similarly, since 1996 production from the non-Organisation of the Petroleum Exporting Countries (OPEC) region has virtually stagnated even as production from OPEC is increasing each year [BP 2006]. Further, it is estimated that by 2020 OPEC would account for 45.2 per cent of the global oil supply from 39.5 per cent in 2004. British Petroleum (2006) aptly puts it when it says OPEC producers gained market share, accounting for nearly

Economic and Political Weekly June 16, 2007

Figure 1: Increasing Concentration of World Reserves Figure 2: Percentage Share of Key Products

1985 1995 2004 2005 Year 1000 900 800 700 600 500 400 300 200 100 0 In thousand million barrels OECD OPEC Non-OPEC FSU Kerosene 8.4 Others 13.5 Diesel 35.9 ATF 2.9Naphtha 11 Petrol 7.7 LPG 9.2 Fuel oil 11.4

Source: Statistical Review of World Energy 2006 (British Petroleum). Source: Ministry of Petroleum and Natural Gas, 2006.

all net increase in global production, as output rose by 9,00,000 b/d.

World crude oil reserves are becoming increasingly concentrated, even as the competition for the resource has intensified. Seen in this light, one fails to understand how diversification of resources can be put to practice? Moreover, given the present and expected scenario of the world crude oil market, to what extent can we reduce our dependence on the west Asia, which currently satisfies 67 per cent of our requirements?

Demand Side Interventions

Given the current situation and unsatisfactory results from supply side interventions, it is critical to shift focus towards demand side interventions. To begin with, we should intervene in the transport sector through fuel economy standards for reducing the demand for fuel per vehicle and through pricing/taxation policies to alter travel demand. These measures are easy to implement and have been successfully employed by many countries with considerable impact.

It is important first, however, to understand what the petroleum product consumption basket for the country looks like and what is the end-use sector wise consumption of these products. Figure 2 shows the percentage contribution in the consumption of key products in the total petroleum product basket for 2005-06.

Over last few years we are witnessing an unprecedented trend. The share of light distillates (petrol, naphtha, LPG among others) between 1995-96 and 2005-06 increased by 67 per cent of the total basket as against a drop of 23 per cent for middle distillates (kerosene, diesel, aviation turbine fuel (ATF), light diesel oil), thus narrowing the gap. While the share of light distillates in the total petroleum products basket was around 18 per cent in 1995-96, it increased to 30 per cent in 2005-06. This has been largely on account of consumption growth in naphtha, LPG and petrol. During the same period, the share of middle distillates decreased from 62 per cent of the total to just 48 per cent. Among other reasons, this could be due to the steep increase in light distillates, which increased the total product consumption, slower growth in diesel, among others. Such has been the change in dynamics of product sales that while in 199596 diesel constituted around 43 per cent of total petroleum product consumption, in 2005-06 it constituted only 36 per cent (later part of the paper brings out the possible reasons). What has been the end-use consumption of these products? (See the table)

Domestic Sector

As evident from Table 1, kerosene and LPG are predominantly used in the domestic sector (cooking and lighting) and constitute around 18 per cent of the consumption basket of products. The penetration of these two fuels is still meagre. In 2004-05, firewood and chips remained most important source of energy used for cooking in rural India with 75 per cent of rural households dependent on it. In urban India, kerosene (10 per cent), firewood and chips (22 per cent), and LPG (57 per cent) are the important sources of energy used for cooking and there has been an increase of about 13 percentage points in the use of LPG and a decrease of 12 percentage points in the use of kerosene since 19992000 [GoI 2007a]. Thus, as their usage grows, care will have to be taken to improve efficiency, which has to be directed towards appliances used for cooking. For example, while LPG stoves are required to be designed to operate at 60 per cent efficiency or higher, field measurements show efficiencies considerably lower than the design specifications [World Bank 2003]. Cooking processes should accordingly be given high priority.

Industrial Sector

The primary fuels used in this sector are naphtha, furnace oil, low sulphur heavy stock (LSHS) among others which constitute around 30-35 per cent of the basket. While naphtha is predominantly used in the fertiliser and petrochemical segments, furnace oil and LSHS are used in varied industries. The potential energy savings in the Indian industrial sector are valued at more than $200 million per year [ADB 2005]. Efficiency improvement in this sector will have to focus on the boiler segments. The IEP call for initiating an efficient boiler programme should be started on a war footing. Interestingly enough, as opposed to other sectors, the usage of petroleum products is showing a decline, thanks to economic imperatives. For example, most of the fertiliser plants using these fuels are already under the process of a change-over to natural gas (current policy stance), as it uses energy most efficiently. Apart from naphtha, which would be used in the petrochemicals industry, almost all other fuels are showing meager growth in consumption till 201617 as against other fuels according to report of working group on petroleum and natural gas for the Eleventh Plan. The government should (simultaneously) check the usage of petroleum products in power generation in industry. With the reform process already underway in the sector, less recourse would be made by industry on their captive plants; bringing about an overall reduction in the demand for these fuels.

Transportation Sector

Petrol, ATF and diesel constitute around 47 per cent of the basket and are predominantly used in the transport sector and hence called transportation fuels [GoI 2006d]. The share of these fuels in the total petroleum product basket is increasing. While they constituted around 33 per cent of the total petroleum product basket in 1970-71, they made up around 47 per cent in 2005-06. However, merely using the total consumption figures of petrol, ATF and diesel as a barometer of their usage in the transport sector could be misleading. Unlike petrol and ATF, not all diesel is used in transport sector; on an average 56 to 60 per cent is accounted for by the transport sector, which consists of road transport, aviation, shipping and railways. But road transport consumption constitutes 90 per cent of the total transport consumption. Thus, around 34 million tonnes of petroleum products are directly consumed in this sector. This constitutes more than 30 per cent of our total consumption of petroleum products which is an underestimate for consumption of petrol and diesel in India grew at 7.3 per cent and

5.8 per cent per annum respectively between 1980-81 and 2004-05 [GoI 2006e]. While the population of India’s six major metropolises increased by about 1.9 times during 1981 to 2001, the number of motor vehicles went up by over 7.75 times during the same period [GoI 2005c]. The compounded annual growth rate of private vehicles in the country (cars and two wheelers) for the period 1991-2004 has been 20 per cent, while non-private, namely, buses and trucks it has been only around 8 per cent [GoI 2006f]. Thus, the share of transport sector consumption should have increased. Why doesn’t data reflect this growth?

This anomaly can be explained by the consumption of kerosene in the transport sector, which goes unaccounted for and deflates the consumption of diesel and hence consumption in transport sector. Raha (2005) says, “nearly half of our total consumption of petroleum products is diesel, especially when the rampant adulteration of diesel by kerosene is factored in. In other words, a sizeable quantity of kerosene released through the public distribution system – estimates range from 30 per cent upwards – is actually used as a substitute for diesel. Kerosene adulteration suppresses the sales figures for diesel.” The National Council of Applied Economic Research (2005) and World Bank (2003) among others have highlighted massive kerosene leakage. World Bank (2003) estimated that half of the subsidised kerosene is diverted to the black market and to other sector such as transport. IEP estimated that only 56 per cent of kerosene released by states reaches people as public distribution system (PDS) kerosene. A lot of kerosene to be distributed under the PDS system is diverted for adulteration with high priced diesel even at the depot levels! Thus, even if we safely assume that 30 per cent of the kerosene is used in the transportation sector, after necessary correction in the end-use consumption data, the transportation sector consumes around 35 per cent of our total petroleum products, still an underestimate for we didn’t account for LDO and furnace oil! Why should we intervene in the transport sector when it consumes 35 per cent of petroleum products?

Globally, transport is an important enduse consumption sector as it accounts for close to 50 per cent of oil consumption and is expected to increase this consumption. The transport sector absorbed 63 per cent of the increase in global oil demand during 2004-30 [IEA 2006]. Consumption of oil products is closely linked to the level of economic activity and vehicle ownership. These two variables explain the bulk of oil consumption growth over time. By sectors, demand for transport fuels is the most important, accounting for 48 per cent of oil product consumption in 2002. Most of the demand growth in oil consumption will come from developing countries, with the demand from the transport sector in the non-Organisation for Economic Cooperation and Development (OECD) region almost tripling from 16 million barrels a day (mbd) to 45 mbd between 2003 and 2030, driven by a sixfold increase in vehicle

Table: End-Use Sector-wise Consumption of Petroleum Products

Product Domestic Commercial/Industry/Manufacturing/ Private Party Sales Transport
Power Generation/ Misc
2000-01 2004-05 2000-01 2004-05 2000-01 2004-05 2000-01 2004-05
Light Distillates
Petrol - - - - - - Consumed in the sector
LPG 74.6 93 18 3.4 5.5 2.3 - -
Naphtha - - 71.5 46.9 31 53.2 - -
Middle Distillates
Diesel - - 41.5 39.4 0.1 3.9 58.5 56.8
ATF - - - - - - Consumed in the sector
Kerosene 90.3 98.9 4.4 1.2 5.2 - - -
LDO - - 95.9 70.6 - 26.5 4.1 3.3
Heavy Ends
Furnace oil - - 79 87.9 16.9 12 4.1 2.7
LSHS/HHS - - Consumed in the Sector - - - -

Notes: LSHS-Low sulphur heavy stock, private party sales included in furnace oil sales. HHS-Hot heavy stock. All figures in percentage, for 2004-05 provisional.

Source: Indian petroleum and natural gas statistics 2003-04 and 2004-05.

Economic and Political Weekly June 16, 2007 ownership [IMF 2005]. Clearly, world oil growth is to be led by the non-OECD transport demand.

Similarly, ADB (2006) points out that the transport sector in 2002 used 21 per cent of worldwide all-sector total energy consumption and is projected to generate over 60 per cent of the increase in total energy use through 2025. The emerging Asian nations are projected to provide much of that future growth in oil consumption. The same study points out that the total fuel consumption of on-road vehicles in China can be expected to grow three and a half times over the next 30 years, while India’s fuel consumption in 2035 will be over six times that in 2005. This demand from transport is largely to be fuelled by the increasing number of vehicles. From 2005-35, overall vehicles as a category in India are expected to grow at eight times, cars and SUVs are expected to grow 13 times the current size, and two wheelers are expected to grow seven times. These segments would thus be the drivers of petrol and diesel consumption. The report of the working group on petroleum and natural gas forthe Eleventh Plan estimated that the consumption of petrol, diesel and ATF will grow at 4 per cent CAGR till 2016-17 in the base case.

We have to understand that usually capital stock changes briskly in the transportation sector vis-à-vis industrial sector. Thus, swift results can be achieved by intervening in this sector. Moreover, investments in transportation efficiency show better results compared to investments in other sectors. For instance, for each $ 1 invested in more efficient oil-consuming equipment (mainly cars) saves $ 2.4 in oil imports, while the same dollar invested in more efficient electrical appliances saves $ 2.2 in investment in power plants and networks [IEA 2006]. Similarly, IEP brings out the importance of this sector when it says,

since no economic substitutes are

obvious for the transport sector at least till

2031-32, energy efficiency of vehicles and

use of mass transport should be given high

priority. If the energy efficiency of all

motorised transport vehicles is increased

by 50 per cent (an efficiency level that is

already achieved in the world today) our oil

requirement will go down by some 86 million

tonnes by 2031-32. If, on the other hand,

railways are able to win back the freight

traffic they have lost to trucks and manage

to carry 50 per cent of freight billion tonne

kilometre, then oil requirement can go

down by 38 million tonnes. These two

initiatives in the transport sector can, together, reduce our oil requirement by over 25 per cent from the most oil intensive scenario in 2031-32.

Road Transport

Fuel economy standards are the most promising strategy to address oil security from the transport sector. It requires that the manufacturers produce vehicles that would give us some minimum mileage and that should keep on increasing with time. Thus, a car bought today should be more fuel efficient as compared to a car bought three years ago. Fuel economy standards have proven to be one of the most effective tools in controlling oil demand and also greenhouse gas (GHG) emissions from the transport sector in many regions and countries the world over [An and Sauer 2004]. Fuel economy regulations have shown impressive results for the US and Japan among other countries. For example, in the US if the fuel economy had not improved, gasoline consumption (and crude oil imports) would be about 2.8 million barrels per day greater than it is, or about 14 per cent of today’s consumption [NRC 2002]. For Japan the set fuel economy standards for gasoline vehicles were reached five years ahead of the goal of 2010. Similarly, the in-use vehicle fuel consumption average has been increasing since 1998 [Minato 2005]. No wonder then nine countries and regions have established or proposed their own motor vehicle fuel economy or GHG emissions standards [Roychowdhury et al 2006]. By introducing fuel economy standards for all categories of vehicles, we will not only be in a position to save scarce resources but also be in a position to reduce GHG emissions from the transport sector – the growing concern in the Indian context [Shah 2007].

Attempts to introduce fuel economy regulations in India have failed. The country’s first auto fuel policy cleared in 2003 by the union cabinet stated that it would be mandatory for automobile manufacturers to declare fuel economy. But three years hence we are still waiting. The only saving grace was the announcement by the finance minister of differential taxation for small cars in last year’s budget (to promote fuel efficient vehicles, among others). IEA (2006) says, “governments can play an important role by introducing fuel efficiency regulations to force automakers to devote new technology to improving fuel efficiency”. In a similar vein, the report of the working group on petroleum and natural gas for the Eleventh Plan says, “current fuel economy standards

44th ANNUAL CONFERENCE OF THE INDIAN ECONOMETRIC SOCIETY (TIES)

ANNOUNCEMENT AND CALL FOR PAPERS

The 44th Annual Conference of the Indian Econometric Society is scheduled to be held at University of Hyderabad, Hyderabad, from 3rd to 5th January, 2008. All those who are interested in submitting papers for the Conference should send the softcopy of the full paper and the abstract (300 words) to Prof K N Murty, Co-convener, Programme Committee (e-mail: knmss@uohyd.ernet.in) and 1 copy to the President of the society, Prof R Radhakrishna, Director, IGIDR, Mumbai. More information can be obtained at http://www.tiesindia.net.

The last date for submission of papers is 15th October 2007. Communication about the acceptance of papers will be conveyed to the authors in the first week of November 2007.

Members are requested to communicate change of address, if any, to the Secretary,

TIES, at the earliest.
Dr. N. R. Bhanumurthy Prof R Radhakrishna
Secretary, (TIES) & Convener President (TIES) & Director
Program Committee Indira Gandhi Institute of
Institute of Economic Growth Development Research
University Enclave Gen. A.K. Vaidya Marg,
Delhi University Campus Goregaon (East), Mumbai-400 065.
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should be averaged…they may be increased by 8 per cent per year during the Eleventh Plan and 5 per cent beyond the end of the Eleventh Plan. The average fuel economy of all new cars, commercial vehicles and two wheelers would increase by about 45 per cent by 2012. Vehicle manufacturers will protest and say ‘it can’t be done’ or ‘it will cost a fortune’, but would comply as experience in the US indicates…” The time is right to put all these into practice.

What would be the best strategy to implement fuel economy standards – regulate it by imposing mandatory fuel economy standards or leave it to the market? The Indian automobile industry and free market experts want this issue to be left to the markets. A consumer’s choices are rational and hence will not purchase fuel inefficient vehicles. Rational consumer choices will automatically push companies to produce more fuel efficient vehicles. Interestingly however data, for example, of passenger car shows that individual choices are not rational. Careful analysis of segment-wise private vehicular sales for India shows that sales of heavier segment are increasing [Shah 2007]. Consumers are interested in buying heavier, more powerful vehicles, which also happen to be more fuel inefficient; Indian data shows exactly that. How do you explain the increasing sales of utility vehicles in India (the most fuel inefficient category); a 117 per cent increase in 2006-07 over 1995-96! In the two-wheeler segment, we are witnessing the launch of heavier and more powerful bikes, which also happen to be more fuel inefficient. This disturbing trend is not confined to India; the US experience also shows similar trend, where over the last 15 years automakers have increased vehicles’ size, weight and horsepower, while holding the petrol mileage steady [Dinan 2004]. This is quite contrary to rational choice. Being left to market forces, Indian vehicles already fare poorly when fuel efficiencies are compared (across same engine size) with different countries’ [Roychowdhury et al 2006]. Thus, it is important that the government mandates fuel economy standards as rational individual choices seems irrational from society’s point of view.

Though private vehicles constitute more than 90 per cent of our new vehicular sales and 86 per cent of the total existing vehicular fleet, it is important to improve the efficiency of commercial vehicles as they are fuel guzzlers. Sadly, in the Indian context we don’t have vehicle-wise fuel consumption data. The draft national road transport policy of the department of road transport and highways brings out the preponderance of the “rigid category” vehicles on the Indian roads (fuel guzzlers) as opposed to the more fuel efficient multiaxle vehicles. In advanced countries, most of the bulk transportation is done on multiaxle vehicles while rigid vehicles do the distribution at local levels. In India, however, most of the transportation is done through these rigid vehicles. A shift to the multi-axle category would not only reduce the demand for fuel but also improve the economics of operations. The government accordingly, should incentivise the process by reducing the taxes on fuel efficient heavy vehicles compared to the fuel inefficient category or simply phase out rigid vehicles for the distribution sector. We should, taking a cue from the Japanese government, simultaneously start working on fuel economy standards for commercial vehicles.

Airline Industry

The aviation sector is one of the fastest growing sectors within the transport sector [IEA 2006]. Seeing the growth in the industry, demand for ATF and the resultant emissions, the International Air Transport Association (IATA) on its part has launched a fuel action campaign. In 2000, IATA adopted a voluntary goal and committed to improve its fuel efficiency by 10 per cent between 2000 and 2010. Such intervention in the face of growing air travel will help reduce the fuel use per aircraft. Steps towards intervention in this sector got a boost when the EU emissions trading scheme (ETS) was extended to the civil aviation sector. Back home, the minister of civil aviation is surprised over the sudden and unexpected high growth in the sector. In fact, expansion of air transport in India is the fastest in the world (growing by 20-35 per cent). Similar interventions will thus have to address the airline industry. Though airlines in India don’t fare poorly compared with their foreign counterparts as far as fuel efficiency of aircraft is concerned, the Indian fuel consumption is higher due to infrastructural constraints. Reduced takeoff and landing time results in direct fuel savings. Currently, however, due to infrastructural constraints airlines incur 5 to 10 per cent additional flying time resulting in higher fuel consumption and annual losses to the tune of US $ 80 million per annum [Prock-Schauer 2006]. Policy intervention in this sector can go a long way as the world over the airline industry has fared better when it comes to fuel efficiency compared to its poorer cousin

– the automobile industry [May 2007] thanks to technological progress that the industry has made.

Railways

Achieving an optimal modal mix between road and rail transport would significantly affect the consumption of diesel, as railways are, on an average, around five to six times more energy efficient than roadways. While in the early 1950s, the share of road transport in freight was around 14 per cent, railways’ share was a healthy 86 per cent. Over the years however, railways are carrying less and less freight. For the year 2004-05, the modal split in favour of road transport was 61 per cent while that of railways had fallen to 39 per cent [GoI 2006f]. Within railways, efficiency can be increased in the usage of locomotives, as consumption of diesel per locomotive over the last four decades has shown no improvement. Within a time bound schedule, road freight should be shifted to railways and a simultaneous increase in the electrification of railways should gather further momentum.

Pricing/Taxation Policies

Though the country has moved away from the days of explicit subsidies on fuels, we have entered the era of implicit subsidies. The government refuses to align the domestic prices with the prevailing international prices, thus encouraging excessive consumption. Implicit subsides on petrol and diesel have increased from 2,304 crore in 2004-05 to around 18,310 crore for April-September 2006 [GoI 2007b]. This burden is expected to increase as international prices won’t relent and government will continue to intervene in the price setting mechanism. One fails to understand why the government should subsidise products that exhibit negative externalities, and are consumed by relatively well-off sections of the society?

Given the consistent growth in vehicle ownership, the time is right to introduce a vehicle quota system for a second car purchase in a family, if not first. Simultaneously, the government should adopt strategies to reduce the usage of private

Economic and Political Weekly June 16, 2007 vehicles and increase that of public transport (buses, metro among others). Perhaps no other country (except of course the US) has ignored public transport the way we have. Current policies favour private ownership of vehicles, at the expense of public transport, be it parking or taxation. Governments facilitate private vehicle ownership by announcing reduced duties, building more flyovers, and increasing road supply. Further, parking across the country is virtually free. Parking policy is the most effective travel demand management strategy. Instead of reducing and pricing parking spaces, governments across the country are increasing the supply of parking space by building multi-level parking facilities. Many countries, however, have used parking as a tool to reduce private transport and increase public transport. Even though the case for public transport is amplified by the fact that, on an average, energy consumption per passenger km by bus is the least and that by car highest amongst road based modes of passenger transport; ironically in our country the total tax per vehicle km in is greater for buses compared to private vehicles!

Bus transport makes the most optimum use of the available road space and fossil fuel by transporting the maximum number of people per unit of road space and passenger km/litre. On an average, a car consumes nearly six times more energy than an average bus, while two wheelers consume about 2.5 times and three wheelers 4.7 times in terms of per passenger km [GoI 2006f]. This only compounds the problem. What is required, though, is a paradigm shift in the way we travel. The national urban transport policy was expected to take lead in addressing these issues but it has failed on many counts [Roychowdhury et al 2006].

Congestion pricing should be initiated in metro cities for private vehicles – the most congested with a high ability to pay. This would slowly but surely increase the demand for public transport. It will also help public transport, as revenue from the congestion pricing will fund improvements in public transportation systems; London is the best example, with considerable impact to show. Taking cue many cities across the world are falling in line.

Conclusion

As discussed, supply side measures like intensive exploration, acquiring equity oil abroad, diversification of sources among others have limited scope to make an impact. The government should clearly pursue demand side management polices comprising fuel economy standards and pricing/taxation policy. As explained, unless we don’t intervene from the demand side, oil security will only remain a “thrust” area.

EPW

Email: chirag@ddn.upes.ac.in

[Views expressed are of the author, and does not in anyway represent the view of the institution to which he belongs.]

References

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Asian Development Bank (2005): ‘Industrial Energy Efficiency Project in India’, Project Performance Audit Report, Operations Evaluation Department, Asian Development Bank, Manila, February.

– (2006): ‘Energy Efficiency and Climate Change Considerations for On-Road Transport in Asia’, Asian Development Bank, Manila.

British Petroleum (2006): Statistical Review of World Energy 2006, June.

Dinan, Terry (2004): ‘Fuel Economy Standards Versus a Gasoline Tax’, Economic and Budget Issue Brief, Congressional Budget Office, United States, March.

Government of India (2002): The Tenth Five-Year Plan Document, Tenth Five-Year Plan 200207, Planning Commission, New Delhi.

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    Mehta, Vikram S (2005): ‘Can Oil Majors Help?’ Seminar, November.

    Minato, Kiyouki (2005): ‘Clean Vehicle Promotion Policies in Japan’ in Deborah Gordon, Studies on International Fiscal Policies for Sustainable Transportation: International Best Practices, a report prepared for The Energy Foundation and The Hewlett Foundation, March.

    National Research Council (2002): Effectiveness and Impact of Corporate Average FuelEconomy (CAFÉ) Standards, Washington, National Academy Press.

    NCAER (2005): Comprehensive Study to Assess the Genuine Demand and Requirement of SKO, National Council of Applied Economic Research.

    Prock-Schauer, Wolfgang (2006): ‘Full Service Carriers – Adapting to the New Environment’, presentation at 3rd Annual India and Middle East Low Cost Airline Symposium, September 29.

    Raha, Subir (2005): ‘Energy Tomorrow’, Seminar, November.

    Ramsay, William (2003): ‘Opening Remarks: Major Oil Security Challenges and Role of Emergency Stocks in World Oil Market’, IEA-India Workshop on Emergency Oil Stock Issues, January 21-22, New Delhi.

    Rao, T N R, (2005): ‘Involve Private Players’, Seminar, November.

    Roychowdhury, Anumita, Vivek Chattopadhyaya, Chirag Shah, Priyanka Chandola (2006): The Leapfrog Factor: Clearing the Air in Asian Cities, Centre for Science and Environment, New Delhi.

    Shah, Chirag (2007): ‘Right Way to Introduce Fuel Economy Standards’, Business Line, February 23.

    Taylor Jerry and Peter Doren (2005): ‘The Case against the Strategic Petroleum Reserve’, Policy Analysis, No 555, Cato Institute, November.

    World Bank (2003): India: Access of the Poor to Clean Household Fuels, World Bank, July.

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