Shift from oil to renewables needs political will

Sushma Ramachandran

Senior Financial Journalist

In the US presidential debate, there was one key economic issue on which both candidates were at complete variance with each other. And that was fossil fuels. Democratic nominee Joe Biden vowed to transition from the oil industry to renewables. Incumbent President Donald Trump, on the other hand, remained friendly to the oil and gas sector, even terming these comments as big mistakes, given the reliance of several states’ economies on this industry.

Biden clarified later that he only meant federal subsidies would be withdrawn from oil companies and also that fracking, widely considered hazardous to the environment, would not be banned.

This fractious debate over the need to phase out fossil fuels is not just taking place in the biggest economy, it is happening all over the world.

It is partly due to the Covid crisis and partly because of the growing recognition of the environmental impact. But the immediate predicament for the hydrocarbons sector has undoubtedly been the pandemic. The global oil industry, which was looking forward to higher prices and increased demand at the beginning of 2020, now faces a continued softening of prices as well as a prolonged spell of low global consumption. Oil-exporting countries are expected to face a contraction in growth by 6.6 per cent this year, according to estimates by the International Monetary Fund (IMF).

It may have been Covid which created the situation, but the spotlight is now also on the future of fossil fuels as climate change is becoming a reality. With the push being made on renewable energy and electric-driven vehicles in most countries, the long-term outlook for hydrocarbons looks increasingly pessimistic. European oil companies like Shell, BP and Total are already talking in terms of energy transition and integrating climate change into future plans.

Having said this, for the time being, these remain the dominant fuel of choice and even Biden conceded as much by saying that they are not going anywhere soon.

The global turmoil in the hydrocarbons sector has had its impact on this country as well. It has unsurprisingly had a positive effect, at least for the time being. For an economy facing a huge growth contraction of over 10 per cent this year, the dip in oil prices has become one of the positives of the Covid calamity. And this is not just a short-term phenomenon. It will likely continue right up to next year.

The IMF’s latest economic outlook says a dramatic recovery of crude oil prices cannot be expected anytime soon. It predicts prices will be in the range of $40 to $50 per barrel in 2021. This is in contrast to the average of $71 per barrel for the benchmark Brent crude in 2018. The decline is balm to the ears of a country that has to procure 85 per cent of its fuel needs from abroad and is currently the third largest oil importer in the world.

The price crash earlier this year even helped the country to purchase enough crude to fill the gigantic caverns meant for 5.3 million tonnes of strategic reserves. These had been only half full till then. The opportunity to fill them at the rock bottom prices of around $25 per barrel came in April and May, giving the country an extra nine days of crude oil stocks.

While this golden opportunity was grabbed in a timely manner, the government did not take an equally positive approach on retail pricing of petroleum products. Instead of passing on the benefits of lower world prices to consumers, it raised excise duties to mop up resources. At a time when the public was suffering grave hardships due to the industrial shutdown and job losses following the lockdown, it failed to ease the pain of rising inflation by reducing fuel costs.

In the coming years, however, the country needs to prepare for shifting away from fossil fuels which includes coal as well as oil. The dark clouds of pollution hanging over many cities, including the capital Delhi, as well as sharp changes in climatic conditions, like unusual flooding, make it clear that more attention needs to be paid to the environment.

The dilemma in an emerging economy like India is the same as in a developed country like the US where Donald Trump still gets support for his anti-climate science point of view. The reason is the petroleum, coal and ancillary industries account for an enormous number of jobs in both countries. They also provide massive revenue to government coffers.

The significance of petroleum, specifically in this country, can be gauged from the fact that it has been kept out of the purview of the Goods and Services Tax (GST). This enables the states to continue imposing heavy duties on petroleum products, making them a major source of revenue mobilisation. Thus, it is not just the Centre milking the oil sector by imposing excise duties, state governments too add their share to the tax burden borne by the consumer. The net result is that India now has the dubious distinction of levying the highest taxes on petrol in the world, as these comprise nearly 70 per cent of the consumer price.

There is little incentive, therefore, to shift to renewable sources of energy in a big way. Even so, there has been considerable commitment to expanding the scope of renewables in recent years. One of the reasons could be the tangible impact of climate change in the form of extreme weather conditions and natural disasters throughout the country.

One can only hope that the targets envisaged in Prime Minister Narendra Modi's address to an energy conference this week will ultimately be met. He maintained India is not only on track to meet its COP21 commitment of 175 gigawatts (GW) of energy generation from renewable energy by 2022, but has even extended the target to 450 GW.

The fact is, however, that the process of shifting from fossil fuels to renewable energy is going to be a slow and painful process. What is going to be critical in this respect will ultimately be the political commitment to carrying out this transition. Issues of revenue and employment are bound to be major constraints but if there is a will, there is always a way.

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