[op-ed snap] A long-term strategy to reduce crude imports

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Mains Paper 3: Economy | Effects of liberalization on the economy

From UPSC perspective, the following things are important:

Prelims level: Not much

Mains level: Strategy to reduce oil imports and make a sustained supply of other cost effective fuels


Context

Turmoil in oil industry

  1. The oil industry has been witnessing significant turmoil and uncertainty in recent months
  2. The primary benchmark for international oil prices, the Brent crude, reached a level ($80.49 per barrel) in May that was not seen since 2014
  3. Histrionics around the US sanctions on Iran have also affected sentiments considerably
  4. In recent weeks, tariffs imposed by the Donald Trump administration and the increasing production from Saudi Arabia and Libya have caused the abatement of prices

Impact on India

High oil prices is a double whammy for India:

  1. It would widen the country’s trade deficit
  2. And also impose a fiscal burden on account of fertilizer, kerosene and LPG subsidies

Possible options to reduce oil prices & their impact

  1. The expectation is that the excise duty on petroleum products might be lowered unless the recent fall in prices sustain
  2. The government had collected around ₹2 trillion from such duties in 2017-18, which played a crucial role in fiscal management
  3. So, lowering the excise duty would exert pressure on the fiscal balance
  4. Alternatively, oil marketing companies (OMCs) may be asked to absorb losses but that would intrude on their capital expenditure plan
  5. That would also send rather negative signals to markets, which have been watching out for any government moves on price control and passing over subsidy burdens to oil producing and marketing companies, and, in effect, rolling back pricing reforms

A strategy that can be used

  1. India now needs a carefully devised strategy that is not driven by short-termism but aims to gradually insulate the country from global oil price volatility
  2. Such a strategy should be centred on three things:
  • Expediting the migration to electric mobility
  1. Since the transport sector accounts for around 70% of the total diesel sales in the country, it is an appropriate sphere for a transition from traditional fuels to electric motors
  2. A favourable incentive mechanism (subsidy up to 60% of the total cost of an electric bus) to help the adoption of electric buses gain traction is already in place
  3. What we now need to do is to get the pace of building electric vehicle (EV) supportive infrastructure to catch up with the addition of new electric buses to the public transportation system
  4. Within the transport sector, trucks alone account for around 28% of the diesel consumption. Thus, creating dedicated electric corridors for trucks on the highways could go a long way in curbing oil imports
  • Expanding the biofuel blending in petrol
  1. Increasing the blending proportion of domestically available biofuels in cooking gas and transportation fuel is another way to reduce India’s reliance on imported crude oil
  2. Ethanol is mainly used for blending in our country and it is mostly derived from sugarcane molasses means its production is contingent on weather patterns
  3. Sugarcane, refining of which creates molasses, is a water-intensive crop, so fresh incentives to increase ethanol production may not be good economics in a country where water scarcity is a serious problem
  4. Hence, methanol, produced from coal, should be given more weightage when it comes to blending
  5. Besides, biodiesel supply should be augmented by making jatropha farming more productive through genetic modification
  • Stimulating exports
  1. If all these measures together reduce oil imports by 20%, the country could save up to $18 billion a year in terms of foreign exchange (assuming oil prices stay around their current level)

Way Forward

  1. Reducing the country’s reliance on oil imports would bode well for energy security, and make our financial markets less volatile in the event of untoward developments in the oil market
  2. The savings from reduced oil imports could in turn be used to finance infrastructure projects, which are crucial for India’s long-term growth prospects
Oil and Gas Sector – HELP, Open Acreage Policy, etc.
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