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Mainstream, VOL L, No 16, April 7, 2012

Energy Security

Friday 13 April 2012, by Bharat Jhunjhunwala


The energy crisis appears to be deepening. The global price of oil is increasing. United States’ President Obama has blamed this on higher consumption by India and China. Growing global energy shortage has encouraged coal-exporting countries like Indonesia and Australia to up the export price of coal. We have limited domestic sources of energy. Our coal reserves are expected to last about 150-200 years but speedier consump-tion of this would lead to a deeper crisis after the domestic sources are exhausted. The quality of domestic coal is inferior. We are almost wholly dependent on imports for our requirements of uranium and oil. Hydropower is beset with pro-blems of environmental- and cultural damage. It is in this background that we have to respond to the increasing pressure from the United States to reduce imports of oil from Iran.

The United States is irked by Iran’s alleged nu-clear weapons programme. Iran has signed the Nuclear Non-Proliferation Treaty (NPT) which binds it not to produce nuclear weapons. Iran has gained access to nuclear technology by signing the NPT. The US allegation is that having acquired nuclear technology under the umbrella of the NPT, Iran is using that technology to enrich uranium to weapons grade in violation of the Treaty. But Iran says it is not producing weapons. It is difficult to conclusively establish the case on either side. Hence we have to take a decision within this uncertainty.

The US strategy appears to be aimed at inciting the Iranian middle class to revolt against its hard- line government. The US does not want to impose a total embargo on trade and sink the country into distress. The US has learnt hard lessons of such an approach with North Korea. Such an embargo led to acute shortage of fuel and fertiliser in that country. That resulted in declining food production, Famine and large scale deaths. Ultimately, the world community had to step in and supply food aid. The North Korean Government did not flinch a bit. The US does not want to repeat that experience. Military action too appears to be ruled out. Iran is a much bigger country than Iraq. Its capital, Tehran, is located far away from the coast. Iran has developed a huge armaments production industry after its war with Iraq. Moreover, any military action may be perceived as an anti-Muslim measure and bring forth retaliation.

The US strategy seems to be to deprive Iran of the conveniences of the middle class. Iran imports goods like electronic devices which are mostly consumed by the middle class. Payments for these are made from petrodollars earned from oil exports. It is becoming difficult for Iran to earn petrodollars. The Iranian rial is devaluing rapidly. The official exchange rate has been reduced from 9000 rial per dollar to 12,600 rial recently. However, the exchange rate on the grey market is reported to be 23,000 rial. This has made imports expensive and deprived the middle class of these conveniences. The US hope is that the middle classes in Iran will revolt against its government in face of these hardships.

The US is asking countries that import oil from Iran to cut the quantities so that pressure mounts on Iran from all directions. Presently India, China and Japan are major importers of Iranian oil. They account for 45 per cent of Iran’s exports. Repor-tedly, the US and Japan have reached an agree-ment under which Japan will reduce its imports by 11 per cent. Notwithstanding public state-ments by Finance Minister Pranab Mukherjee to the contrary, the Government of India has also reportedly asked the importing oil Public Sector Undertakings to cut imports from Iran by 10 per cent. Whether this has been done under US nudging is anybody’s guess. Europe has already stopped importing oil from Iran. Unsold stocks of oil are mounting with Iran. Pressure is undoub-tedly mounting on the Iranian people but whether this will translate into agitation for or against the government is to be seen. The Iranian people had occupied the American embassy in the seventies in similar circumstances.

IN these uncertain circumstances the question before us is: whether to cut imports from Iran or not. The first point is regarding energy security. It will be difficult to meet the shortfall due to reduced imports from Iran. We will have to purchase oil at a higher price. Second, we may lose our foothold on Afghanistan. It will be difficult for India to sustain her influence in Afghanistan against the combined pressure of Pakistan and Iran. Japan is placed differently than us on this count. It is likely to face no defence fallout of an anti-Iran posture. Third, we stand to gain from Iran’s offer to accept 45 per cent of the payment in rupees. This will help boost our exports and help bridge our increasing current account deficit.
The fourth is the fallout of the impact of the crisis on the global economy.
Throttling supplies from Iran will lead to increase in price of oil unless Saudi Arabia steps in a big way to pump out equivalent amount of oil in addition to present production. An increase in price will affect all oil importing countries, including most OECD coun-tries, adversely. At the same time it will be equally beneficial for the oil exporting countries including Venezuela, Nigeria and Russia. This may lead to recession in the developed countries. However, in my reckoning, the net impact on the world economy will be small. The centre of economic power will shift from the importing to exporting countries. The loss of purchasing power of Germany will be made up by the increase in the purchasing power of Venezuela. Nevertheless this will impact India negatively through higher oil prices.

The fifth point is of lesser inflows of foreign capital and access to advanced technologies from the United States and Europe. Refusal to toe the US line will deprive us of these benefits. However, the impact of reduced capital flows is likely to be small because it will be partly neutralised by increased flow of petrodollars. Yet, there will be some negative impact that has to be taken on board.
My assessment is that continuation of imports from Iran will provide us benefits in energy security and increased exports from rupee payments. On the flip side we stand to lose from higher oil prices, reduced inflow of capital and access to techno-logies. In this balance, I would vote to cooperation with Iran.

Ultimately we will have to reduce our consumption of energy. We cannot be energy-secure if our consumption exceeds our production hugely. We have to face the tradeoff between energy consumption and energy security head on. Increased consumption will endanger security; and increased security can only be got by reducing consumption. We must realise that the capacity of mother earth to generate energy is limited. We must find ways of improving our standards of living with reduced consumption of energy. Otherwise we will land ourselves into a situation where we are hooked to high consumption which we cannot sustain and this may even lead to collapse of our civilisation just as happened to our forefathers of the Indus Valley Civilisation.

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