Sushma Ramachandran

An energy crisis is threatening to derail the revival of the economy. Coal stocks have depleted at thermal power generation plants in several states leading to power shortages. Simultaneously, world oil prices have surged to three year highs, a serious concern for a country that imports over 80 per cent of its requirements. The increase in fuel prices at the retail level has also created inflationary pressures on the economy.  While these are worrying developments, other indicators like GST collections, auto sales, consumer and capital goods output, and railway freight traffic have shown a marked uptick. Export growth has been another bright spot in the revival process. But these positive signals could easily change to negative by the prospect of power shortages affecting key industrial sectors. Similarly high fuel prices can also be disruptive by raising costs across the board.

The shortfalls in coal supply seem to have been caused by both short term and long term factors. Long run issues include a gradual decline in production by the  premier producer, public sector Coal India Limited, in recent times. This has been partly attributed to the slowing down of production over the past few years owing to the lack of policy directives to raise output significantly.  The other short term hurdles have been persistent rains during August and September that have stalled operations at coal mines. Besides, imports have been curtailed partly due to high international prices. The result is that several states have found thermal plants are down to just a few days stocks. Recent action on stepping up supplies, however, seems to have contained the crisis for the time being. Latest official data shows that the number of non-pithead plants with less than four days coal stocks has fallen from 70 to 61, indicating an improvement in the situation.

As far as fuel is concerned, the crisis centres around the soaring prices of crude oil in world markets. This is in sharp contrast to last year when prices were hovering around 30 to 40 dollars per barrel and even crashed to 19 dollars at one stage. Now prices of the benchmark Brent crude have touched 85 dollars per barrel, a peak last reached in 2018. The firming up of crude prices has followed the spike in natural gas prices in recent months.

The latter has risen due to a combination of factors including higher demand following the receding of the pandemic in many parts of the world. But it is also a consequence of lower oil and gas drilling owing to depressed demand last year which in turn led down to a drawdown in inventories especially in Europe. The spurt in gas prices has meant that some sectors including power and fertilizers all over the world have been facing restricted feedstock availability. The situation is easing slightly now as exports of liquefied natural gas (LNG) from the U.S. are picking up and gas prices are slowly softening.

Crude oil prices, however, are continuing to harden as demand picks up around the world. One reason for the higher prices has been the impact of hurricanes in the Gulf of Mexico which led to curbs on output from offshore areas. In addition, OPEC plus or the oil cartel OPEC along with its allies led by Russia, had fixed a level of 400,000 barrels per day as increase in output from September onwards, ostensibly to meet the surge in world demand. But this has not been enough to meet the needs of burgeoning international economies while heating demand has now arisen as well with the onset of colder weather.

The rapid rise in oil prices has caused concern in this country which has rightly reached out to its long term suppliers in West Asia to seek a moderation of prices. India is joining hands with another major oil importer, Japan, to urge oil producers to raise output and thus stabilize the market. It has also warned OPEC plus that a slowdown in economic activity owing to high oil and gas prices could be counter-productive by ultimately curbing demand.

Energy availability and pricing is thus facing a crisis just as the economy seems to be on the threshold of a firm revival. All efforts to bring about a broad-based recovery could be hampered by power shortages and high fuel prices. In the case of the former, there is much within the government’s control. It needs to increase coal output on a war footing to meet the short-term needs and prevent shortfalls in power availability. These have already occurred in some states like Jharkhand, Bihar and Rajasthan  which reported power shortages ranging from 6 to 24 per cent in the first week of October. On the plus side, reports indicate there is already some improvement in coal stocks while there are even proposals for strategic reserves of this raw material in the long run.

As far as oil is concerned, however, there is little that the government can do barring trying to improve oil conservation which is a long term issue. In case the overheated oil market does not subside, the oil import bill is going to prove a heavy burden for the exchequer. On the retail side, the burden is increasingly on consumers with petrol and diesel rates having reached record levels. The cascading inflationary impact especially due to enhanced transport rates is also a source of worry.

The immediate solution to prevent an impending energy crisis is thus two fold. First, to ensure that coal output is enhanced while imported supplies are also stepped up.  And second, to continue the diplomatic outreach in tandem with other big importers like Japan to urge oil producers to raise output and thus stabilize a volatile international market.