End of oil is near: Realistic responses needed
By the Economist
The Sri Lankan economy has to reconcile itself to continuing high oil prices and adjust itself to cope with them. Wishing that oil prices would come down to previous levels is unrealistic. Our energy policies should not be guided by such erroneous ideas. Adjust to higher oil prices or perish is the order of the times. With the end of international reserves of oil predicted in about 30 years, the trend of increasing oil prices cannot be reversed. In fact the rising trend is likely to gain momentum as the years roll by towards the third decade of the millennium. Within this period there may be fluctuations in prices and short periods of price declines but the upward trend cannot be reversed.

Last week Professor Lakshman Guruswamy, Nicholas Doman, Professor of Law and Director Energy Environment Security Initiative, University of Colorado in the United States brought out this message very clearly when he addressed an erudite audience at the Centre for International Studies. He pointed out that the world's oil resources would end in 2038, at best. Professor Guruswamy in his lecture, THE END OF OIL: THE UNITED STATES & SRI LANKA made a strong point about the end to global resources of oil when he said, the end of oil is in sight. At the optimistic end of the spectrum the Energy Information Agency (EIA) of the United States, suggests that the peaking of oil will occur around 2038. Are we responding to this? Owing to the price increases as well as increasing consumption, the expenditure on oil imports has been increasing.

The sharpest rise was last year when the country spent US $ 1209 million for oil imports alone. This was about a 50 per cent rise from the import expenditure in 2003, when it was US$803 million. Import expenditure on oil constituted 15 per cent of the total import bill and 21 per cent of the total export earnings. Our import expenditure on oil is higher than the total earnings from agricultural exports. It is in fact nearly twice the total of inward remittances to the country. Although garment exports earned US$ 2809 million, over twice the import value of oil imports, it was perhaps less than the net earning from garments, the country's main export.

The net earnings from garments are estimated at around US$ 1123 million. Such is the severity of the problem of oil to the Sri Lankan economy. Oil imports are creating a huge dent in our trade balance. Oil imports constitute about half the trade deficit of US$ 2.4 million of last year. The huge balance of payments deficit of last year was largely the result of the oil import expenditure. The pledge of aid to the value of US3 billion would no doubt ease this year's balance of payments, but is hardly a reason to be complacent about this fundamental problem that will continue to haunt us for the foreseeable future. Hydro electricity is virtually at its peak production. Certainly the increases in electricity consumption are outpacing increases in hydro electricity generation. It is generally assumed that the country's main energy source is hydro. Not so. In 2004 hydroelectricity contributed only about one half of our energy. Thermal power accounted for much of the other electricity generation. If we are to depend on thermal power generation then the escalating costs of oil will have a serious impact on the economy. There is an urgent need for both conservation of energy use and alternative sources of energy.

In this critical context, Sri Lanka lacks a proper energy policy. The government subsidises electricity, especially to middle class consumers. The pricing policy for household electricity is hardly conducive to conserve energy. Similarly in spite of the high prices for petroleum products, they are subsidised and consequently demand is not aligned to international pricing. Such subsidisation is hardly conducive to the conservation of energy. Conservation of energy too would be a short-term respite not a permanent cure. There is a dire need for conservation of energy in the short term and the exploration of alternate sources of energy generation as the permanent solution.

The enormous losses that the CEB and the Ceylon Petroleum Corporation incur reflect both the inefficiency and the extent of the subsidy. SL could conserve more fuel by efficient and adequate electricity generation, distribution and transmission policy. There are several alternate energy sources. Coal power plants are an obvious option but is based on import of coal and feared to be environmentally damaging. Wind power is another option that has not been seriously explored. Solar option like the wind option is relatively expensive. Yet the escalation of oil prices would change the relative costs of different forms of energy. Hydropower can add only a marginal amount to the national grid. There are other locally explored options as well such as Dendropower generation.

The nuclear option is not realistic and practical at present. It is to other options we must turn to. Meanwhile conservation of energy is a palliative. These are issues that are not addressed and perhaps ones that cannot be addressed in our political context. The energy issue is both a short term and long term issue.

A long-term perspective based on the realities of the global scenario is urgent and imperative. Procrastination in finding solutions would however lead to higher costs and burdens in the future and further economic vulnerability.

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