Economical use of oil and the development of alternative energy sources to replace fossil fuels could be the answer to dealing with the fuel crisis.

I was at this workshop as a resource person and the organisers had used a novel way of introducing me to the participants. They had selected some entries about me from Google’s search machine and flashed them on the screen. One such entry referred to my making a statement to the media that “fuel prices should be raised to reflect the international prices”.

The participants consisted of local politicians, private sector entrepreneurs and government officials. Everything went on well until we reached the questions and answers session when a local politician took issue with my previous statement relating to the fuel price increase. “What’s the logic behind this fuel price increase recommendation? Doesn’t it add to inflation?” he wanted to know. Others in the audience from the private sector and the government sector too held a similar view. “When fuel prices are increased, all other prices too would go up, because they are connected to both transportation of people and transportation of goods. Don’t you make all prices go up with that single price increase?” a public servant asked.

This line of questioning led to a very fruitful and interesting discussion. “True that the fuel price increase leads to an increase in the costs of the transportation of both people and goods. Then bus and railway fares have to go up. In a similar fashion, the prices of all other goods which are transported from one place to another before use will also go up. But that’s the intention and it’s beneficial,” I said. This explanation did not go well with the mood of the audience which felt that price increases should not be made because they harmed the poor consumers.

It gave me an opportunity to explain the economic reasoning behind the recommendation. “Whatever we do, we need energy to power it,” I said. I drew their attention to the lights over their heads and said that those lights have illuminated us because somewhere else either diesel or furnace oil or coal has been burned to produce power to turn the massive turbines that generate electricity. “As a whole, about 81 percent of the world’s energy requirements are met out of fossil fuel such as petroleum, coal and natural gases. When the demand for these products exceeds their supply, their prices in the international markets should naturally go up. This is exactly what happened during the last three-to-four-year period. That’s how crude oil which was sold at 20 dollars per barrel in 2003 has now gone above 140 dollars per barrel today. When you’re faced with such a situation, all your current operations and plans get upset. So, economists call it a ‘shock’ and since it comes from outside, an ‘external shock’. It’s like you go out and all of a sudden without any warning, you’re hit by a rain,” I explained to them.

“But, shouldn’t the government help us in that situation?” a private entrepreneur asked aloud. “Take that rain example,” I said. “When you’re hit by the rain, you could go for cover temporarily. But if the rain is going to be permanent, you’ve to buy an umbrella to protect you. That’s called adjustment to the rain. In a similar way, a government can protect people from an external shock only temporarily. If the shock is permanent, some adjustment should be made, though it’s painful. In this case, sooner the adjustment, better for the country”

“Why do you say so?” a government servant wanted to know. “When we buy fuel at a higher price and sell it at a lower price, there’s a loss and that loss has to be borne by someone. In this case, it’s the government which has to bear it. But governments don’t make money. They tax us, that is, get money from us by force, or borrow from us. That’s to say that they coax us to part our savings with them voluntarily. But that would reduce the savings available to us for our own purposes. If both don’t generate income, then there’s a third method.

That is printing money. But it would lead to inflation and inflation hits all of us. So we take a one time increase in cost of living today to protect us from continuing inflation in the future,” I explained. Now the audience appeared to have come to some sort of understanding and therefore I continued. “Those losses borne by the government are known as subsidies and subsidies have a cost. This is because no government has unlimited resources and when it uses those limited resources for one’s use, it has to sacrifice some other use. Hence, our subsidising the fuel sector means we’ve to forgo roads, bridges, schools, hospitals, universities and so forth. So, we use cheap fuel, but lose everything else. Hence, subsidising fuel prices isn’t the proper solution to the problem of rising international prices,” I said.

“What’s the proper solution?” again a government servant asked. “The proper solution is the economical use of oil and the development of alternative energy sources to replace this fossil fuel. Both are hindered by price subsidies on consumption. This is because unless you feel it in your purse, you won’t reduce its consumption. At the same time, if fuels are available at a cheap price, why worry about discovering other alternatives? So, people have to adjust themselves and that adjustment is painful.

They don’t adjust if they don’t have to incur a high cost.” “What about poor people? You economists seem to be anti-poor,” the same government servant raised another issue. “No,” I said firmly. “Economists are not anti-poor. If there’s a necessity for protecting the poor, there’s no harm in giving them a temporary support, specifically targeted for them. But poor people should be told in no uncertain terms that it would be a temporary relief and after a given time frame, it would be withdrawn. In that way, the support helps poor people to adjust themselves to new prices gradually.”