Saturday, June 7, 2008

Fuelling debate

The alchemists are giving the black gold a makeover- turning it to platinum or uranium or some such numbingly expensive substance. And for this substance-addicted societies in the west and the emerging ones of the east, the northward migration of the fuel prices is a subject of intense concern.

Swaminathan Aiyar (SA) writes in the STOI (admittedly one of my fav hunting grounds) that, amongst others, India is subsidizing the OPEC. Let's start with this point. India refuses to have an open market for fuel - for fear of uncontrolled prices and consequent impact on election results. Indian politicians prefer to take a seemingly virtuous position by subsidizing fuel in the interest of the weaker sections of the society. SA argues - with no underpinning - that the beneficiaries of the subsidy are indeed the rich - and hence there is no virtue in the subsidy. This is clearly is weak argument - and not merely for lack of underpinning. Fuel prices have a direct impact on the entire economy. On the face of it, a person using 100 liters of petrol a month benefits more (from the subsidy) than a person using 5. But look at the holistic picture- the entire country relies on goods and services which include a factor of fuel prices in their costs. Poorer people have little headroom in their monthly balance sheets. The richer you are, the more maneuverability you have with respect to your expenses.
SA further argues that if India stopped subsidizing fuel, then like with other goods, the law of demand and supply with catchup and soon there will be lesser demand. This claim requires serious underpinning. With other commodities, say onions, if the prices soar high, the market can correct itself - due to decreasing demand, but more so, due to improved yields, better rain cycles etc etc. In other words, the production of onions can be controlled by human intervention assuming cooperation of the divine. Note also that we can survive without onions. Also, onions donot impact a number of other commodities we use in our lives. Fuel is clearly a different type of commodity - one that fails to fit in the oversimplified laws of economics that SA tries to apply to commodities in general. Lets examine why.
a) We are no where close to finding an alternative to fossil fuels. All talk of green fuels, sustainability etc is just that - No more than 5% of human energy requirements are met by these green options. [The rest are met by a combination of fossil and nuclear sources]. So, human intervention in finding a technical alternative has not yet yielded results. Regarding human intervention for discovering new oil fields, this seems to be happening, but due to a combination of reasons (including the ones that follow), there is no let down of prices. The simple rationale is that fossil fuels are limited resources, and we will run out some time. The only discussion is when.
b) Fuel is an infrastructure commodity. Increase in fuel prices imply higher infrastructure costs, and this affects the entire economy - unlike increase in prices of standalone commodities.
The laws of supply and demand would still apply to fuel, but then one needs to make provisions for a number of special factors in the case of fuel - especially the TINA factor.

So, is there a solution to the fuel problem? A number of approaches are possible, but lacking a crystal ball, there can be no guarantees of success. But, there are a number of hurdles and the biggest is the acceptance of the problem - or the size of it. This should be the subject for another blog, unless I can relegate it to the impossibly small margin :-).

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