Oil, Oil!

While we still look poised to witness a global energy and food crunch, experts projected that the demand for energy will continue to grow. They called for the use of biofuels and other measures to respond to the nation’s energy crisis at a committee meeting in New Delhi.

The heat has slowly been turned up and the Indian consumers are being boiled alive. The fact is same all over India and a fundamental change is needed in the way India uses energy. “We cannot drill our way out of this crisis because we simply don’t have the reserves,” said the spokesperson at the meeting, adding that demand of oil will increase by 30 per cent over the next two decades.

The meeting was set to focus on the prediction for international oil supply and demand in the coming decades. The committee said that it is trying to provide an accurate projection for prices (given the wide disparity between analysts) some of whom project $200 a barrel. Mr. Adam Sieminski, economist at Deutsche Bank, expects that oil prices will drop to $105 a barrel next year and will stabilize at $85 in the long run. But despite this, experts believe that demand will increase to 100 million barrels a day in 2015 and 112 million barrels a day in 2030. Most of the production growth will come from OPEC, which will produce 46 million barrels a day in 2015 and 54 million in 2030, up from 35 million in 2008.

However, in the times of oil creating mayhem, the key to the relief window lies in the use of the non-conventional energy sources such as solar energy, wind energy and biofuels. A leading automobile company Toyota has already announced the launch of its unit that will research and develop vehicles running wholly on non-conventional sources like hydrogen and solar.

The renewable sources are likely to get a boost by the fact that future projects in oil and gas are likely to be more complex and remote, resulting in higher costs per unit of energy produced. However, the way to these clean sources is also not easy. When I tried to contact a person I know who manufactures turnkey equipments used in wind energy plants, he told me that he is “preoccupied” for the next five years and is already working 24 hours to complete the existing orders.

For India, oil imports accounts for nearly 32 per cent of total import bill. The oil bill in April ’08 stood at 8 USD, up by 46 per cent y.o.y, while the trade deficit for April ’08 stood at 9.8 USD, up by 44 per cent y.o.y. Rough estimates suggest that a 10 USD rise in oil price could increase the current account deficit by about 6 billion USD. This sum is sufficient to wipe out India’s total Forex reserve in the next 5 years. So much so that if the oil prices do not have dramatic fallout in near future, the inflation can touch the 10 per cent mark. Such high inflation will spurt a sharp depreciation in rupee, worthier worsening the trade deficit. This will force RBI to come into act and to put pressure on the independence of rupee. If the rupee is forced to be stabilized, there will come a liquidity crunch which will make loans expensive and will wipe out the investments. This would also be the last bye to the already stringent FII flow. The situation can only reverse only by the reversal of the oil price march. Till then nobody, including the government, have much options than to wait and pray. Nonetheless, we can give back a punch to the oil rich nations by reducing our dependency on oil by using public transport or battery-run vehicles. Now I guess it is do or die!

Saurabh Sharma

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