The bio-fuel revolution may bypass sons of the soil

The bio-fuel revolution may bypass sons of the soil

If the sugar industry was allowed to produce ethanol and market it at the right price, the farmers could make about Rs 1,500 per tonne of sugarcane. Sharad Joshi

The increasing volatility in the prices of crude oil, which crossed $146 a barrel before dropping over $20 from that level, provides the right background for promoting exploration of domestic sources of petroleum. It provides an even better opportunity for developing bio-diesel and ethanol as a valuable additive or substitute for petrol.

It would appear from the addresses given by Central ministers at the recent Bio-Fuel Summit 2008, organised jointly with the CII, that the advent of bio-fuels is unlikely to change the pattern of thinking of the government. The Minister for Agriculture, Mr Sharad Pawar, was the chief guest at the Summit, and the Minister for New and Renewable Energy, Mr Vilasrao Muttemwar, delivered the keynote address.

Bio-fuels, whether in the form of bio-diesel or ethanol, are produced from plants. Bio-diesel can be produced from edible oilseeds, such as rapeseed, soyabean, palm, sunflower, etc., as also from non-edible oilseeds such as Jatropha curacas, Pongamia, neem and karanja.

Ethanol, a petrol substitute, is produced in India from sugarcane/sugar-beet and molasses, and can be produced from corn, sweet sorghum and most forms of wet bio-mass.

Farmers have been cautiously optimistic about this new development. In the past, they have had the bitter experience of the rapid expansion of the co-operative sugar industry, which not only brought little benefit to them but also actually added to their indebtedness and misery.

Remunerative prices

For years now, farmers have been agitating that they be paid at least the statutory minimum price (SMP) for their sugarcane, around Rs 900-1,000 per metric tonne. The sugar barons are protesting that the industry is in no position to meet even this demand.

Rough calculations show that if only the sugar industry was allowed to produce ethanol and market it at prices not too far below the present retail price of petrol (Rs 56 per litre), sugar factories could earn an income of around Rs 1,900 from every tonne of sugar-cane crushed.

The farmers would then be able to demand a price of around Rs 1,500 per tonne of sugar cane. This example only suggests the kind of advantage the farmers could get from the advent of bio-fuels, if only the government did not come in the way.

If a farmer had the possibility of producing ethanol, using technologies that are already available, on the farm, he would be able to make an extra income of around Rs 2,500 per day about 200 days per year.

The farmers hoped that the Government, this time wiser by the experiences of the Nehruvian socialist regime of “negative subsidies” on agricultural produce, would follow policies that would, at least, not deprive the farmers of their legitimate dues. The farmers hoped that, in the present epoch of economic reforms and liberalisation, the Government would liberalise the licence-permit regime and make it possible not only for the sugar industry but also for smaller units manufacturing khandsari and even jaggery to produce ethanol.

Ethanol manufacture would be worthwhile not only if the present market situation of crude oil continues but if the Government stops its policy of bearing a major proportion of the cost burden. The present policy of keeping petrol artificially cheap has proved to be counter-productive in many respects. The new rich of the Indian economy vie with each other to acquire cars that are increasingly petrol guzzling, indifferent towards proper maintenance of the car engines as also towards economic driving. Recourse to public transport and pooling of cars among people with identical routes is frowned upon as ‘infra dig’.

The policy of state subsidy on petrol prices has proved not only counter-productive but also anti-national.

A number of relatively small neighbouring countries, such as Indonesia, Malaysia and Thailand, have made rapid strides in producing bio-diesel and generalising its use.

Brazil stands in a class of its own as regards manufacture of bio-diesel and ethanol and encouraging their widespread use. Brazil at present allows an ethanol blending up to 25 per cent and even the Thai government has been implementing a blend of 10 per cent. In India, however, it would appear that there are vested interests that wish to promote import of fossil oil from abroad and discourage the use of bio-fuels.

Mandating a blend

Car owners in India are a highly enterprising and innovative lot that have been modifying the car engines depending upon the balance between petrol and diesel prices. Recently, when the Supreme Court ordered the conversion to C&G engines, it took place without much hassle.

It is quite clear that if the Government shows the necessary political will, car-owners will opt for the best blending solution and modify, if and when necessary, their car engines. The owners of two-wheelers in India have been, for a long time, accustomed to blending petrol with the desired quantum of engine oil. It should not be too difficult to provide the possibility of ethanol blending from zero per cent to 20 per cent in near future.

The NDA government made a good beginning by mandating the use of 5 per cent ethanol in petrol. The UPA government has gone back on this on the pretext that such a mandate did not correspond to the realities of the demand and supply situation.

And in the market system encouraged by the present Government, it is the petroleum companies of India that called for tenders from the ethanol manufacturers after setting up a maximum price, which has been around Rs 21.57 per litre. This, again, is clear evidence of the anti-farmer bias of the existing government. The marketing flow could have been easily reversed by leaving it to the ethanol manufacturers to call for tenders, specifying a minimum price that could be fixed as a certain percentage of the retail petrol price.

The mindset of the present government was evident from the fact that the Agriculture Minister himself made it very clear that the government is in no position to recommend any specific variety of Jatropha on the basis of its yield or economics.

On the contrary, a delegate from Chhattisgarh gave a brilliant account of the work done by the State Government there, not only in increasing production of Jatropha but also making a high blending popular, even for the existing models of vehicles in India. He categorically stated that the Chief Minister himself used unadulterated bio-diesel in his ‘Tata Safari’.

Flawed policy

The inclination of the UPA government to discourage bio-fuels is patent from the number of clauses it is trying to build into the national bio-fuels policy at present on the anvil. The Government has unnecessarily decked up the food vs. fuel controversy and clearly shown its unwillingness to use edible oil seeds as also agricultural cultivable lands for the promotion of bio-fuels.

The experience in Chhattisgarh and Thailand has clearly shown that the debate is entirely pointless and that promotion of the use of even edible oils for the production of bio-diesel has not affected the food situation there. It would also appear that the UPA government is thinking of keeping the farmers away from the production of both of bio-diesel and ethanol and relegated them to the position of mere suppliers of raw material at a minimum support price (MSP) that is to be fixed on the basis of cost of production rather than the market situation.

Dr Manmohan Singh gave the green signal to a loan waiver scheme only six months back. He is, however, depriving the farmers of a golden chance to make their vocation the most lucrative of all by making use of the bio-fuels revolution.

The author, a Rajya Sabha MP, is Founder, Shetkari Sanghatana.

Oil On The Boil PART 2

“GDP growth could fall to about 7.3 per cent in FY09,” says Sonal Varma, economist at US investment bank Lehman Brothers, based in Mumbai. “From producer through consumers to the government, the direct and indirect effects can have a significant negative impact.” Further increases in raw materials, transport and input costs could add to the uncertainty about economic growth for companies.

Rising oil prices eat into profit margins, particularly in energy-intensive sectors; companies could reduce services and cut production. Already, domestic airlines are cutting flights and raising prices to make sure their losses don’t get bigger than they already are. As in the US, the auto industry will be the first to feel the effects. Car sales, which have been riding high demand, are likely to decline. Transport companies could also reconsider fleet replacement plans.

Apart from consumer and producer confidence, high and rising oil prices influence investor confidence, too. Importing oil to keep its economic growth engine humming comes at the cost of a worsening trade balance. “The current account deficit will grow from 1.2 per cent of GDP to 3 per cent,” says Varma. “And the fiscal deficit, after including the off-balance sheet oil and fertiliser bonds could go as high as 9 per cent of GDP from its current 7.5 per cent.”

The impact on stockmarkets and foreign institutional investor (FII) interest is likely to be a double whammy. FIIs have already been net sellers, and declining confidence could push them to sell off even more. Valuations of companies — and consequently shareholder and household wealth — could take a big hit.

Political (Mis)Calculations
Finance Minister P. Chidambaram will be familiar with this Tamil saying: when the water level rises above your head, it doesn’t matter whether it is by one foot or ten feet. The targets in the Fiscal Responsibility and Budget Management Act are unlikely to be met. Finance ministry officials, however, disagree. By combining price hikes with customs and excise duty cuts on petroleum products, his government will bear the most. The deficit gap can be bridged, maintains Expenditure Secretary Sushma Nath. The revenue loss amounts to about Rs 22,600 crore, whereas tax collections have increased by 45 per cent this year. “Whether and how we will make good those losses will be decided later,” says Revenue Secretary P.V. Bhide. Finance ministry officials are unwilling to talk about the impact on the macro-economic situation, preferring to wait and watch.

A stoic Chidambaram declined to comment. Prime Minister Manmohan Singh, in a nationally televised address on 4 June, said consumers could not be fully insulated from the rise in global oil prices. For the Congress, this could not have come at a worse time. The country is already reeling under the impact of an inflation rate of 8.1 per cent. The price hikes are likely to contribute another 1 per cent almost immediately. For every rupee increase, about 0.18 per cent gets added to wholesale price inflation.

A Reserve Bank of India (RBI) study undertaken a couple of years ago sought to identify indirect effects of fuel price increases. Based on that study it is likely that as fuel price increases filter down through the economy, another percentage point is likely to be added as transport costs add their bit to consumer prices.

“With inflation already as high as it is at 8 per cent, it will exacerbate inflationary expectations,” says Siddartha Sanyal, economist at Edelweiss Capital, a Mumbai-based securities firm. “The price hikes reinforce these expectations; it will be built in by manufacturers and service providers, and become a self-fulfilling prophecy.”

GOING UP IN SMOKE: The war in Iraq has led to a steady increase in crude prices over the years (Bloomberg)

For the RBI, raising already-high interest rates to combat inflation, in the face of a slowing economy, adds to the difficulties of making hard monetary policy choices. To the mix, add the effects of the farm loan waiver, the Sixth Pay Commission’s recommendations, and the prospect of a price-wage spiral looms large. “We are paying the price for not increasing prices earlier, with a difficult and large hike now, which in the long run may prove inadequate,” says an analyst with a securities firm in Delhi.

Scenario Planning For The Future
Is the government’s response to rising crude oil prices — duty cuts, issuing oil and fertiliser bonds while keeping subsidies and marginal increases in fuel prices — sustainable over the long run? No one appears to have the answer to that one. But this much appears clear: if the government had not decided to raise fuel prices, the state-owned oil companies would have run out of working capital by the end of September.

Three solutions suggest themselves in the current situation. First, and contrary to conventional thinking, developments at this stage of the political cycle — it is an an election year — present an opportunity for the next government to plan for and publicly debate a long-term plan about energy policy. That would make politically difficult decisions more palatable for the population, and dispel the idea of the government as the people’s mai-baap. The people — yes, even the poorest ones — needed to be treated as being intelligent, capable of making informed choices as customers and citizens, and willing to pay the price for them.

Drilling For More

Here’s an alternative scenario: oil at $80 a barrel (bbl). Sounds fantastic? Not according to some. A trader on the Chicago Board of Trade — he declined to be identified for this story — says that he is short on oil right now, and expects oil to decline to about $75 to $85 a bbl in the next six to eight months.

His rationale: a significant part of the price of oil is the premium related to terrorist attacks or sudden disruption is supply. “Look at what happened when there was a storm in the Gulf of Mexico”, he points out. “Oil is presently so volatile that prices move on any suggestion of supply changes.” Over the next few months, that premium — estimated at about $35 a bbl — is likely to come down.

Others point to the revised reserves numbers of British Petroleum’s North Sea fields; a report said that those reserves were at least a fifth larger than originally estimated. Mike Thornton, development director at UK Oil & Gas — an industry body — said that another 26 billion bbls remain to be recovered from the North Sea. Oil flow has been declining for a few years now at about 3 per cent. About 37 billion bbls have already been recovered thus far. And orders for exploration and drilling equipment from Baker and Hughes, the largest provider of such equipment in the world, have increased dramatically.

Libya — long out of the international oil market — is expected to raise its production from 1.8 million bbls a day to 3 million bbls, a 40 per cent increase, by 2012. Libya has ‘proven’ reserves of 29.5 billion bbls, much of which is yet to be extracted. Western countries — the UK and the US in particular — which had banished Libya from western markets because of the country’s involvement in the 1988 Lockerbie bombing, are now satisfied that the country does not espouse or encourage terrorism any more.

The world is waiting, watching and hoping.

Second, the government should use its oil exploration company ONGC to try and secure oil and other fuel supplies much like China does: entering into partnerships with other governments and offering to use our capabilities in that area to identify and exploit new oil finds all over the world. While some such deals exist — with Nigeria and Brazil, to name two — there is a case to be made for being more aggressive and emulating the Chinese in this context.

Third, if we are going to live with fuel subsidies for some time to come — we may be able to do away with most and just keep those necessary for the poorest sections of the society — why not subsidise alternative fuel technologies? There are many who suggest that we can be more enterprising and move beyond carbon development mechanisms and other band-aid solutions to climate change, and focus on moving away from fossil fuel-based technology over the next few decades. That would be both environmentally responsible and forward looking. Another option could be liquefying coal, of which there are abundant supplies.

The world over, crude oil prices are moderating. “To tackle under-recoveries we are hoping global prices will correct,” says Bhide. Perhaps. But it appears unlikely. Instead, it might be worthwhile to emulate Albert Einstein’s thought experiments: devices of the imagination to prepare for what we might need to do when oil does reach $200 a barrel.