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| 'Every time you have subsidised prices, it hits energy efficiency' | | Q&A: CHRISTOF RUEHL |
| Jyoti Mukul / New Delhi Sep 01, 2009, 00:38 IST |
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 The world of energy witnessed high volatility last year. Though energy prices have recovered since, industry is conscious of slowing demand. BP’s eminent economist CHRISTOF RUEHL spoke to Jyoti Mukul on the need to have market pricing and removing bureaucratic distortions. Edited excerpts:
According to the BP statistical review, crude oil production outside Opec fell by 1.4 per cent, the largest decline since 1992. Was this decline due to largely demand-side dip? How do you think it will be during the current year?
It was more supply related. The year 2008 was still one of high prices, at least until the summer, and incentives to produce were present. The non-Opec supply decline was due to maturing fields, especially in the North Sea and in Mexico, but also in Russia, where production declined for the first time in a decade. To a smaller extent, high costs have played a role. However, the big underlying factor (including in Russia) were the barriers to access and investment, which have gone up almost everywhere over the past seven years of rising oil prices.
However, we see the first signs of a recovery of supply in non-Opec countries, including an unexpected stop to the decline in Russia due to policy improvements in the wake of Russia's economic crisis. It could be, therefore, that we will end this year with zero or moderate growth outside Opec.
India's crude oil production has not kept pace with the increase in demand for oil. What impact do you see it having on the economy?
In principle, the more oil imports rise, the higher is the oil bill for the importing country. But this does not mean it should avoid imports at all cost. Even if a country has a choice to import or to produce domestically, it still needs to evaluate whether it is cheaper to import. There is no point in being self-sufficient for self-sufficiency's sake. Once a country needs to import, then the only way to minimise its cost is to improve energy efficiency. Ensuring the best possible conditions for domestic exploration and production, together with making sure a price system is in place which fosters energy efficiency, are the policies which maximise competitiveness.
Do you think pricing and marketing freedom for crude oil and natural gas, especially in the Indian context, is important for encouraging investment in exploration?
Yes. Market prices direct resources to their most productive use. And they also help to avoid all the bureaucratic distortions associated with price setting by an administrator. Think about the nightmare of having to fine-tune and regulate a global price in one domestic market. Economically, it is just very costly.
Now, this is not to deny that there may be transitory requirements before freeing prices completely — especially in situations where a monopolist can dominate supply or where a lack of infrastructure or other impediments makes it impossible for consumers to compete effectively. But even where transitional requirements are in place, it remains important to be clear the endpoint of any price reform must be free prices.
There is an ongoing debate in India on gas pricing, with the country having different regimes for gas depending on the way a field has been allotted to a company. Do you think there should be uniformity of pricing?
This is not a black or white situation. The price should, of course, be left to the market if one wants an efficient system. Indian gas prices are no exception. But, as I said earlier, one has to recognise that, especially in the initial stages of development, when one faces a monopoly situation on the supply side or access restrictions on the demand side, there may be a need for removing price controls gradually. However, this should never serve as an excuse — price reforms need to be driven by the final goal of price liberalisation and the process has to be transparent and quick. Otherwise one just creates new distortions, bureaucracy and inefficiency.
In the overall energy basket, coal still accounts for a majority increase in consumption. How long do you think this will continue?
This is likely to continue for the foreseeable future, simply because coal is a fuel which is domestically available almost everywhere, including in the industrialising growth economies which need electricity, countries of which India is a big example. China is an even bigger example. The attempts to limit carbon emissions eventually will disadvantage coal, but this is still far away.
Nuclear energy is the only sector that has recorded a global fall in consumption. What was the reason for this and what is the way ahead for India especially since the country has entered in to a civil nuclear deal with the US?
The reason for this was not of any systematic nature, but there were two one-off events last year. First, we saw exceptionally long maintenance periods, especially in the UK. Second, Japan's biggest nuclear power station was out for the entire year, after an earthquake.
In the medium term, many countries have plans to increase production but this takes time; and we know that plans do not always translate into action. All told, I would think that in the medium term, nuclear will slightly increase its share in the global energy mix, but the situation will not change dramatically. India is, of course, one of the countries where we should see the share of nuclear power increasing fairly substantially.
India has an administered pricing for all energy consumed by domestic or common users, though for coal, prices are kept low even for industrial consumers. How far does it impact efficiency and investment?
Every time you have subsidised prices, it impacts efficiency adversely. Energy efficiency always increases after a period of high prices. This is not only driven by the private reaction to high prices to consume less energy; it is also driven by governments, who tend to act only if they really have to - and this, as a rule, happens to be in the wake of high price periods.
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