Fuel for thought

The Times of India “expose” into the alleged damaging effects caused to the average Indian by the recent rise in fuel prices is too simplistic in its analysis to be dismissed as anything but another piece of sensationalist journalism, designed to evoke a knee-jerk response from the reader (and perhaps a slightly higher circulation). Comparing the current price of petrol and diesel in the country to those in the rest of the world, and arriving at a broad conclusion on the “unbearable” nature of these price hikes is, at best, a similar approach to the Economist’s “Big Mac” Index that, while informative and somewhat amusing, simply does not delve deep enough to be of much value to those trying to understand the reasons behind the issue (not to mention that a Big Mac in India is fundamentally different from that in any other country!) What’s worse, the newspaper has actually done its readers a disservice by trivializing what is increasingly a very important issue for the nation (energy supply as a driver for development) into a tagline for use in the next election (“Bijli, sadak, paani….aur petrol!”) This article seeks to correct that perception and, rather than portraying the Indian consumer as an unfortunate victim of a geopolitical conspiracy between OPEC, oil companies and the Indian government, suggests that there is a wonderful opportunity to consider an alternate pathway for development that would, in the long run, reduce the dependence of the nation on this single source of energy.

To understand how we have arrived at the present situation in India, one needs to first look at the historical trend in oil prices, and the role that markets and governments have played in setting a price that reflects both the availability of supplies and the demand for different products. Oil is a trillion dollar a year global business with a seemingly endless list of applications – beyond just providing fuels for transportation (which is the primary focus of the ToI gripe), its products and by-products are found in everything ranging from asphalt to zips. By singling out a particular product (petrol), therefore, you run the risk of not capturing the overall benefit that an economy gains by acquisition of petroleum. 

The business of bringing finished energy products like petrol and diesel to the market involves a whole host of players, but for the sake of simplicity, let’s narrow them down to just three – a consumer, an oil company and a government. We start with the consumer because, for the most part, he or she has the least influence in this three way relationship – the only available option is “take it or leave it”, a recognition that for the sector in which it is used primarily, namely transportation, there are few viable alternatives to oil. Simply put, the minute you own a car or scooter or motorcycle, the only leverage you have over the impact of fuel prices is by how much you choose to drive. And all the theories about people switching to mass transit when prices rise are just that – theories. Having made a substantial investment in a personal form of transportation, the impact of even a doubling of fuel prices will be easier to justify than leaving your car parked at home. If you are one of the millions who still are willing to hop on a bus and sweat it out with your fellow Indians, the effect is somewhat less, but sooner or later the ticket prices will reflect the rising cost. At least the airline industry has made the fuel impact transparent by listing it separately as a component of their fares (how those numbers are calculated is a different matter - we assume that they are linked directly to global markets with no “corrections” applied by the various airlines).

An oil company invests in technologies and infrastructure to take a resource from inside the earth, process it into a finished product, transport it to different regions and finally deliver it through a nozzle at a location that needs to be convenient for the consumer. A private oil company runs its business purely on economics – large swings in price either on the raw material or product side can play havoc with its goal of delivering a return to the shareholder. A national oil company, like an IOC or HPCL or BPCL, has the added burden of a “social responsibility” to provide fuel at reasonable prices (the reference to Venezuela having the cheapest fuel in the world is a reflection of PDVSA working in the same manner as our oil navratnas).

The role of government is the most complicated – it ranges from control over leasing of blocks for exploration, granting licenses for production, refining and marketing of products, developing regulations to meet environmental and quality standards and – very importantly – taxation at every step of the supply chain. The energy sector is a huge source of revenue for virtually every country on earth (Norway, with a population equal to that of Bangalore, has a sovereign wealth fund of almost $ 500 billion from its taxation of energy production). It is estimated that around 15-20% of the fuel price in the US is linked to taxes, while that number is closer to 50% in much of Europe.

The role of the Indian government, however, has been to not just impose taxes but also control the prices at which fuel was sold in the market, consistent with its aim of “protecting the poor”. The result, however, was that while the rest of the world has learnt to cope with changing prices, we have only just become aware of what fuel really costs, now that the government has started to abandon its price controls. Since India’s economic reforms started in 1991, the global price of oil has fluctuated by a factor of almost 15 (from a low of $ 10/barrel in the late 1990s to the high of $ 147/barrel in 2008, a few months before the collapse of Lehman Brothers). The corresponding variation in fuel prices has been less dramatic, somewhere around a factor of 4-5 in the US, partly because the market for gasoline (petrol) and diesel is decoupled from that of oil. The price in India, however, has changed more due to currency devaluations with respect to the dollar than any direct impact of global oil prices. In 1990, the year before the reforms were introduced, a liter of petrol was approximately Rs 14 ($ 0.78 @ Rs 17.5/$). Today, a liter of petrol is Rs 75 ($ 1.59 @ 47 Rs/$) – a mere two fold increase, which is not unreasonable given the price increases we’ve seen for other goods and services (in contrast, a haircut in 1990 would have set you back around Rs 20, today its closer to Rs 100). It’s a different matter that in 1990, the economy was not as dependent on petrol as it is now – but that’s the way free markets work. If you want something badly enough, you will be prepared to pay a higher price in order to get it. The ToI article appears to insinuate that somehow the current petrol price is “unfair” for Indians, whereas the reality is that prices are neither “fair” nor “unfair”, but a reflection of what the market is willing to bear!

Now, while the government is raising prices (rather, removing price controls) on petrol and diesel, it is by no means freeing up the entire energy sector. That’s because there are still price ceilings on other petroleum products like kerosene, which has historically been viewed as the poor man’s fuel, and CNG, which is fast replacing petrol in bus and taxi fleets. And let’s not forget the biggest governmental lever in the entire energy space – the free electricity provided to farmers year after year! Should that ever be scrapped (and it will take a very courageous politician to even hint at doing that), it will make the current petrol drama seem insignificant in comparison.

So that’s the story behind the prices, and why the “shock” we’re experiencing is really one of our own (government’s) making. Now, as a developing nation, India clearly has a growing need for energy. Let’s correct that statement – India has a growing “need”, and a simultaneous growing “want” for energy. Unlike the developed nations of Western Europe, Japan and the United States, where smaller population sizes and an inherently different social structure led to a more uniform growth across different economic classes, India’s biggest challenge is that its path to development has resulted in a large disparity between its upper and lower strata. While 70% of the nation still engages in small scale farming, and uses energy mostly for basic needs such as running a tractor, the remaining 30% that lives in cities and large towns aspires to the quality of life enjoyed by their counterparts in New York and London. These are no longer needs but wants, energy in pursuit of pleasures rather than necessities. And while one would argue that the transition from needs to wants is inevitable, and should be seen as a positive trend, it does stick out when contrasted with the more down to earth requirements of the vast majority of Indians. Like the famed “digital divide”, there is also an energy divide that pits the two sides against one another – and, in an increasingly capitalistic economy, the higher purchasing power of the 30% will no doubt have a greater influence on the outcome as compared with that of the 70%.

Only a small number of die-hard environmentalists and Gandhians would oppose the view that India should continue to develop as a (more or less) free market economy, and that energy supplies will need to increase if more and more people are to experience a rise in their standard of living. But while 30% of the country has cast its vote for a development model that is linked fully with oil, let’s not assume that the solution needs to be the same for the remaining 70%. Let’s rephrase – if the solution for the remaining 70% is to be the same, then we need to prepare ourselves for energy shocks that will dwarf the current one we’ve encountered. The petroleum consumption of the country will more than triple and, combined with the thirst of our giant neighbor to the north, completely upset global energy markets. Bringing a new oil or gas field online takes years or decades – in contrast, making and selling more cars and other consumer products is a much quicker process. In the tug of war between supply and demand, the former is the tortoise, the latter the hare.

Even though we speak of the West as a single entity when it comes to development and energy use, there are in fact two distinct models that exist – one from the US and the other from Europe. The fact that an average citizen of Europe has about half the carbon footprint of an American indicates that the two models are indeed quite different. The biggest driver for this difference has been their respective approach to energy – while Europeans have accepted high taxes on their energy for many decades, the US has constantly pushed the view that “cheap energy” is as much of a fundamental right as that of free speech. This basic difference in outlook has led to the growth of public transport all across Europe (trains, metros, trams, buses), while the US has fully embraced the automobile and created suburban communities connected by multi-lane highways with gas stations placed every few miles, just to reassure drivers that they are never far from the next fill-up. 

What about India? Let’s first look at the 30% who are already “developed”, and for whom switching to a different track in the near term will be difficult. For this group, continuing to improve the quantity and quality of fuels available should be the first priority, with a switch to more efficient cars and perhaps hybrid electric vehicles the next step. In terms of supply, we have barely any oil reserves, but the past two decades have seen a significant investment in the downstream sector, to the point where the single largest oil refinery in the world today sits at Jamnagar, courtesy Reliance Industries. Additional investments are planned by the other state owned oil companies, many of whom are operating 1950s vintage plants that were built by the pre-nationalized entities Esso and Shell. These will greatly increase the availability of high quality fuels across the country but, as mentioned earlier, the rate at which demand is growing will mean that any new capacity brought online over the next decade would likely fall short. We do have huge amounts of coal that could one day be used to meet the additional demand for electricity as and when the transportation shift occurs (the fact that we had a Reva on the streets well before the auto companies of the US, Europe and Japan embraced electric vehicles should be a sign that Indians are capable of thinking differently in this regard!) But environmental concerns and a global trend away from high carbon fuels will require cleaning up coal fired plants, which can be an expensive proposition. On the demand side, what we do need to avoid is the “super-sizing” of vehicles, a trend that unfortunately seems to be growing with the advent of SUVs and high performance cars. One hopes that Maruti Suzuki is right when it claims that most Indians are interested first and foremost in the mileage of their vehicles – this will drive them towards making more energy efficient choices, like their European counterparts, versus investing like the US in cars that are still gas guzzlers by global standards.

For the remaining 70%, who are preparing to transition the energy divide, we need to give free rein to our imagination. These are people who are as yet untouched by modern energy, except on the fringes. Before we rush off and develop new ways to bring the same old energy supplies to these tens of millions, we should first seek to understand what form their demand is likely to take. Let it not simply be a case of showing them what is available and asking them to choose, but to also explain the consequence of those choices. And while government needs to relax its control on energy prices on the one hand, it must ensure through its policies that the path to development in the coming decades is driven firmly in the direction of diversifying India’s energy supply, with an increasing proportion of renewable energy sources. At the same time, there has to be an effort to educate the general public about the importance of energy for development and also the need for energy conservation. It is becoming increasingly clear that saving a liter of fuel is far more valuable in the long run than adding the equivalent capacity. Perhaps then we can begin to have a meaningful debate about energy prices, as opposed to appealing to the baser instincts of people through misleading comparisons.

A choice to make

In the famous cult movie from the 1990s, “The Matrix”, the main character Neo (played by Keanu Reeves) is confronted with a life-changing choice early in the script – that between a red pill and a blue pill. Taking the blue pill puts him back into the virtual world in which he currently lives, where existence is nothing more than a sophisticated computer program. Taking the red pill, however, leads him down a path of no return – learning the truth behind the Matrix, and thereby also breaking free from it.

A similar choice faces the world today when it comes to energy, and it is one that should not be ignored. Whether it is understanding the details behind the Gulf of Mexico oil spill, or appreciating the challenges of meeting basic human needs for over half the world’s population, a greater awareness is required of how human desires have shaped the current energy paradigm that today dominates the developed world, and is poised to become the enabler for the developing world to stake its claim tomorrow to global stardom. It is unfortunate that discussions on this topic usually take center stage only during a crisis, and typically subside soon thereafter, despite reassurances that “this time it’s different”. The inconvenient truth (with apologies to Al Gore) is that most of us don’t care what it takes to keep the world running, just as long as it continues to run. Only when oily waves start breaking on the shore are we all forced to take off our rose-colored glasses and acknowledge reality.

From burning wood to stay warm thousands of years ago, to using the energy from splitting an atom to power an entire city today, mankind’s energy journey has been fraught with triumphs and setbacks. Every advance to a newer form of energy has come at a cost – often in the form of lives lost, and environmental disasters. It is folly to imagine that there is a single solution that could meet human wants on a global scale, while at the same time being guaranteed round the clock and at an affordable price. It is also short-sighted to overlook the fact that every solution has an adverse environmental impact – whether it is in mining the lithium to make hybrid car batteries, or the silicon required to make solar cells. Politicians and philosophers have often commented that the human imagination is limitless – sadly, that has translated into a limitless capacity for energy usage, which has compounded the problems being faced today.

For the US, the oil spill is an unpleasant continuation of the energy crisis from two years ago, when soaring oil prices rudely awakened consumers, and resulted in slumping SUV sales, talk of OPEC conspiracies and a subsequent recession that continues to this day. It was not the first time that the US had faced this nightmare – almost 30 yrs earlier, President Carter tried to educate the American people about the dangers of a lifestyle addicted to wasteful energy. But rather than follow the path laid out by him (which seems ahead of its time, even when viewed by today’s standards), the nation took the blue pill and went back to business as usual. The greening of the environment was not sufficient motivation for people to compromise the greening of their wallets.

Is the US even capable of making a change, one might ask? The seeds of its energy consumption were laid decades ago, with the suburban sprawl that commenced after the second world war, aided by the construction of massive highways and a love affair with the automobile. There is not a single activity that does not require man-made energy of some form or another – from drying clothes (clothes lines are so 19^th century!) and reading books (I just love my new Kindle!), to recreation (fire up the jet skis!) and, ironically, even getting back to nature (get in the RV and drive 500 miles into the wilderness). The power blackout in New York City back in August 2003 is symptomatic of what energy shortages would mean for the US.

But what about India, which has just begun the journey to energy greatness? Shortages are still common even in big cities, and have highlighted the need for better infrastructure and greater policing of power theft. The car market continues to grow at a breathtaking pace, and the golden quadrilateral is mostly in place, but thankfully most consumers have continued to focus on petrol costs in their car buying decisions. Having chosen to excel in services rather than manufacturing like China, the total energy required by factories and other industries has also been moderate. And while the aspirations of India’s upwardly mobile are no less than their western counterparts, the population density in most parts of the country, while a tremendous burden to the infrastructure, could actually be the saving grace. Most Indian towns are compact, not sprawled out like those in the US. Public transport was in place well before the Maruti appeared, and the recent example of the Delhi metro suggests that mass transit is not likely to lose favor for the average citizen. Having faced energy shortages for decades, Indians are more apt to go for highly energy efficient goods and practices.

So while the oil spill is not affecting Juhu Beach in Mumbai or the backwaters of God’s own country, for India this could be the last fork in the road, the final opportunity to take the red pill instead of the blue one. Please choose wisely.

Telan Gana Mana

A hundred million years ago, all the continents were joined together as one, in a great big mass called “Pangea”. The Atlantic Ocean was absent, with the Americas snugly fitting around the western perimeter of Africa, and India itself was an island loosely floating around in the location of modern day Madagascar. Change is inevitable, however, and over time these great land masses have floated away from their original positions, leaving us with the world we have today.

While the forces of nature replaced Pangea with seven continents, the ideologies of man have wreaked much greater havoc! The empires and kingdoms of ancient and medieval times have given way to modern nations and city-states, but the propensity for humans to create, divide and rename the land they live on has remained the same. The bases for these changes have ranged from religion to language to political and cultural affiliations, but in each case, the impact has been to cause upheaval and turmoil for the majority, with a small minority claiming a benefit from the new (dis)order.

At the time of independence, India had over 500 princely domains, all of which needed to be integrated into a manageable number of new states for administrative purposes. While Sardar Patel did a masterful job of knitting these together and getting the fledgling nation on its feet as an independent republic, the last sixty years has seen a steady reversal of his vision, as group after new group has laid its claim to an area of land to call its own.

It is perhaps fitting that the call for the new state of Telangana is being made by the same linguistic group that started us down this path in 1956. And an even bigger coincidence is that it took another fast unto death to spur the government into action (unfortunately, the protagonist of the 1950s version of the drama did not have the good fortune to live to see his dreams come true). By acquiescing to their demands, the Center has obviously made a calculated decision – refuse, and risk alienating yet another (large) faction to add to the existing ones, or accept, and risk that the demands for every other “-land” will now only intensify. Thousands gave their lives over the demand for Khalistan and the ensuing “Punjab problem”, which thankfully is a distant memory today. I doubt that we have the resources, or the will, to undertake a similar fight.

The demand for Telangana, surprisingly, is neither on linguistic nor religious grounds, but on primarily economic and political considerations. In this regard, it is similar to the demand of the colonists for the creation of the United States, which was being excessively taxed by King George III, and with no representation in the British Parliament. The difference is that the US did not have to share a common boundary with its former master, and was able to develop on its own terms. The evisceration of Telangana is perhaps more akin to the demand of the Southern states of the US to secede, an action that led to a brutal civil war and eventual victory for the North. It’s clear that the “center” in that particular incident from history was not willing to tolerate any claims of separatism!

The Telangana issue has hopefully also put into perspective the whole “re-name game” that has been played across the nation over the past decade. While it is only a minor inconvenience to re-label maps with the name of a new city (or road or airport), the demand for a separate state is not a small claim. It will create yet another administrative bureaucracy, another hand at the table reaching out for the same dwindling pool of resources, another possible coalition partner for a government at the center. Just as the Kaveri waters dispute has created a rift between two other Southern States, the focus now could shift to the Godavari. And of the three large states that were created in the past decade,  Jharkhand continues to be lawless, Chattisgarh is a Naxalite heaven, with Uttarakhand alone showing some decisive leadership in….changing its original name.

The obvious question to ask is – where does this lead to? Are we headed for a wholesale return to the India of 1947? After all, the names of the princely states still exist on maps, as do the memories of their Rajas in the minds of the people. It would not take much to carve out Gwalior from Madhya Pradesh, Baroda from Gujarat, Mysore from Karnataka and.....Hyderabad from Telangana! Let’s hope KCR and his friends have prepared for such an eventuality. Having started the first domino toppling, it would be hard for them to oppose a similar demand, even if it comes from within their own ranks.

And while we contemplate such serious issues, let’s spare a thought for the thousands who perished in the tsunami five years ago, and the survivors, many of whom have yet to put their lives back together. Jai Hind!

Kissa Visa ka

It was an early summer morning towards the end of May 1994, but the day was already turning out to be a scorcher. Wincing at the prospect of having to stand in line for perhaps several hours outside the US embassy in Chanakyapuri (this was in the days before appointments!), I grabbed my folder with documents arranged the night before and started to revise what I would tell the visa officer when my turn finally came. The question that I dreaded most was “Prove to me that you will come back to India”. Apparently, a few people I knew had not been able to answer it satisfactorily and found their applications rejected within a few minutes. The fact that my sister was already in the US was not going to help, but I wasn’t about to volunteer that information. I fiddled nervously with my watch, trying to look calm, while at the same time trying to gauge from the faces of people exiting the interview rooms whether they were successful or not.

The ruckus over the recent proposed changes to Indian visas brings back memories not only of that interview day fifteen years ago, but also the challenges that so many Indians and people of other nationalities have faced, especially since 9/11, when traveling to the West. And that’s because immigration authorities, especially those in the US and UK, have very willingly exercised their right to control entry of people from all over the world into their respective countries. The thought that someone getting off a plane could be a possible terrorist is enough to initiate all manner of questioning and investigation, which continues to this day (as Shahrukh Khan can no doubt attest!). I count myself among the lucky ones who only had to undergo the occasional “special” search at an airport – there are likely hundreds of others who were outright denied visas to visit family or take in the sights at Disneyworld or Buckingham palace.

While the Americans and Brits may cry foul about the new Indian regulations, and warn of impending loss of tourist revenues, the bottomline is that the decision to admit anyone into a country is solely the prerogative of that country’s immigration authorities, and should not be subject to any form of coercion. Just like a driver’s licence, a visa is not a right but a privilege, and anyone getting that visa has the responsibility to adhere to the requirements of that visa. As opposed to the current knee jerk reaction, however, the Indian authorities should take a comprehensive look at the entire system for visa issuance and tracking of people within the country.

The first step is to ensure that people are applying for the correct visa. Examples are given of Indians abroad using tourist visas to visit home, instead of getting a PIO or OCI which “takes time”. I got my OCI card in 3 weeks and it was an extremely painless process – there should be no excuse for not getting one, especially since the cost of the tourist visa is not much less. There are instances of foreign nationals using tourist visas for long term stays in India, to avoid going through the “hassles” required for residency. This is clearly a double standard - neither the US nor the UK would accept a resident staying on a tourist visa, so there’s no reason why India should either.

Secondly, visitor tracking should be made fool proof. In most cases, visitors are required to provide a travel itinerary with flights and hotel stays and phone number of a local contact. A random audit of these in real time will not only reveal cases of overstaying, but also make visitors realize that the authorities are serious. Even if someone is thinking of staying for a few extra days past their visa expiry, the knowledge that they might be caught should be a deterrent.

Every country has its share of illegal immigrants, who enter either under false pretexts, or simply stay on and “disappear” into the crowd. The US has perhaps 10 million, most of whom are from Mexico and are there looking for work. But there might be a few hundred who are potentially dangerous and are biding their time to create havoc. Should that happen, the US will certainly introduce clamps on visa issuance and border entry similar to what India is attempting. And they won’t care if those changes possibly impact tourism, as long as they believe that it will keep their citizens safer. And that is the central question to pose to the MEA – will a two month delay between trips really prevent another David Headley from entering the country? Or is vigilance required at a very different level from that offered b the immigration system?