Demand conservation: An essential plank towards energy security

Their argument would have contained essentially three strands.

Oil is finite; the easy discoveries have been made and though large accumulations of hydrocarbons are still in the ground, they will not be easy to locate and develop because of technical, logistic and operating complexities; and finally, the existing producing provinces in the Middle East, North Sea and elsewhere are on the edge of inexorable decline.

This group will not have suggested that the end is imminent but simply that the global energy economy is fast reaching a break point and that unless suitable alternatives are established, the world will face extreme volatility and significantly higher prices.

The second group would not have been dismissive of these conclusions. But they would have argued that the bottle is half full, not half empty. And they would have premised their argument on the countervailing power of technology.

In their view, technology has consistently disproved the doomsayers.

The 8220;Club of Rome8221;, for instance, projected the end of oil almost four decades ago. Their projections proved wildly wrong. Later, other sceptics doubted the capability of the industry to drill in the North Sea, Siberia and other remote locations because of extreme weather conditions and harsh logistics. They too have been proved wrong. Today, the North Sea is a major producing region and the Sakhalin LNG projects will go on-stream sometime next year.

This group will not have argued that technology can overcome geological heritage; only that it has the track record to overcome emergent logistic and operational hurdles.

They will also have argued that oil8217;s position as the mainstay in the energy mix will not be eclipsed because of scarcity. Their position is best summed up by the quote attributed to the former Saudi Oil Minister, Sheikh Yamani: 8220;The stone age did not end because the world ran out of stones and the oil age will end long before the world runs out of oil.8221;

The divergence between these two groups is in fact, less extreme. They differ essentially over the nature of the pathway in long term.

The first group believes that it will be rocky, unpredictable and subject to continually rising prices.

The second accepts that it will be volatile but subject to the fundamentals of demand and supply and the 8220;known unknowns8221; of geopolitics. The oil market will exhibit the cyclicalities of commodity markets in general moving from conditions of excess demand to excess supply and then in reverse.

Both however agree that in the short to medium term, oil will be the dominant fuel.

The chief reason is the absence of a practical substitute. They agree that the current efforts to create alternatives viz. hydrogen fuel cells, bio fuels should eventually break oil8217;s near monopoly, but this is unlikely to happen in the foreseeable future.

The block is not technical. A breakthrough on that front may well occur. It is the physical and perhaps financial challenge of replacing the current entrenched supply infrastructure of refineries, pipelines, depots and retail outlets to accommodate an alternative fuel. The world, alas, is bound to the existing inflexible supply chain.

The policy consequence for oil importing countries is clear.

The risks of oil import dependency cannot be mitigated in the absence of a well directed set of measures to contain the demand for gasoline. Such measures will never be easy to implement, as they involve a change in established lifestyle. But it can be done. Indeed, it has been done. For instance, after the 1973 oil price hike, President Carter promulgated two Acts.

The first, in 1974, was the 8220;fuel use Act8221;. This discouraged utilities from using liquid fuels and natural gas for the generation of electricity. The second was the Corporate Fuel Efficiency Standards CAFE Act in 1976. This mandated automakers to improve fuel efficiency from an average of 12.9 miles per gallon in 1974 to 27.5 miles per gallon by 1990. A maximum speed limit was also imposed.

These Acts, coupled with the fact that gasoline prices were allowed to rise from 39 cents per gallon to 1.20 per gallon between 1973-85, were successful in rebalancing the energy mix. Oil was squeezed out of the non-transportation sector and as smaller cars of lighter weight came into the market and people drove more slowly, the consumption of gasoline was substantially reduced.

Unfortunately for the US this trend did not last. People shifted back to gas guzzling SUVs in the 8217;90s following a relaxation of policy and the slide in oil prices.

Today in India, with economic growth, more and more people are moving up their aspirational ladder. Cycles are being replaced by two wheelers and two wheelers by cars. The expected boost to gasoline consumption and the consequent implications for air pollution has to be a major concern.

China is facing a similar worry. But they seem to be moving aggressively to mitigate the consequences. Apart from hiking retail prices, some of their cities have, for example, instituted an odd-even license plate policy, so individuals can only drive on every alternative day. They see the creation of public transportation and an improved railway network as an investment priority; car manufacturers are bound by ever tightening efficiency and emission control standards etc.

Our policies need a similar sense of urgency.

Politics, legacy interests and financial limitations will no doubt limit the scope of the measures that can be practically implemented. But the consequence of doing nothing could be crippling.

James Schlensinger, President Carter8217;s first energy secretary, described the approach to energy amongst oil import dependent countries as 8220;we have only two modes8212;complacency and panic8221;.

I doubt we will ever become complacent.

But there is a risk that the spate of announcements of discoveries of large reserves of natural gas in the Krishna Godavari basin offshore East India, may distract us from an essential reality.

Natural gas cannot meet our requirements for transportation fuel in the foreseeable future. That will be met only by petrol and diesel. We have to recognize that these two products will remain the dominant transportation fuels and their position will only be dislodged as and when an alternative that is equally easy to use, efficient and less polluting, can find its way into the market. that will happen one day, but not in immediate future.

In the meantime, it is important that we identify and implement clear measures for reducing the rate of growth of gasoline consumption.

And more generally, we place demand conservation alongside the development of indigenous hydrocarbons as the core planks of our energy security policy.

The writer is Chairman, Shell Group in India. The views expressed are personal