What is behind the energy crisis?

All recent published reports indicate that the daily average supply of 225 MW in the northern region is only half the 450 MW demand. The storage capacity at Baghabari is 32,174 tonnes against an annual demand for nearly 500,000 tonnes of diesel in the northern zones of the country.

The farmers in Kurigram switched to diesel-run irrigation pumps after hundreds of electric pumps were rendered useless for lack of power supply. Recently, more than 1,700 of those diesel-pumps in the district were facing diesel shortage or blackmarket price spikes. These examples, to the exclusion of numerous others, are cited to make a point that the fuel crisis did not just surface out of the blue, it is the result of lack of leadership and understanding of the country's affairs.

Tap here to add The Daily Star as a trusted source

"When I was the president of the country, I used to read 18 newspapers daily and used to ask the ministers concerned almost immediately to look into the relevant sector that went wrong. There is a serious crisis of fuel and power and the government is dubbing all these are media-projected." It doesn't take too much intelligence to decode who these remarks were directed to by former President Ershad.

Many suspect that the PM is not up to her job, depends too much on Kamal Siddiqui and Harris Chowdhury, and thus fails to keep herself fully abreast of the country's affairs except when her nemesis is calling street agitations and hartals. Getting advisors' briefings about the day's events and knowing some of those by reading newspapers are different thing.

Anyway, both Khaleda and Hasina must realize by now that winning election and governing the country are not the same. Whichever party rules the country after the next election, oil supply and prices will be their Achilles' heel. It is imperative they both appreciate why I am drawing a glum picture of future oil prices and management of the economy of the country.

An increase in oil prices generally does not have much impact on the economy as a whole if users are convinced the increase is transitory. Economists contend that both demand and supply for oil are "inelastic"i.e. relatively insensitive to price changes.

As a result, a small change in either supply or demand will lead to relatively large price swings. Uncertainties about future supply-demand discrepancy results in unpredictable price changes that take a toll on the economy.

Market analysts and policy-makers infer that factors inducing uncertainty in future oil prices include political events abroad, prices of oil futures contracts and past episodes. Some estimates indicated that US invasion of Iraq added a "war premium" of $5 to $15 per barrel. Other events such as political violence in Venezuela lowering its oil production by 90 percent and internal strife and violence in Nigeria caused a production slack.

The supply-demand imbalance due to production disruptive events was further aggravated due to higher worldwide demand pressures. These include Tokyo Electric Power's shutting down 13 of its 17 nuclear reactors and unusually cold weather in the US. Inventories which were at their lowest level since 1975 failed to cushion the demand surge. Add to these China's inefficiency in energy utilization which is only 30 percent as efficient as the US. These factors worsened the already widespread uncertainty regarding the size of future price increases which caused some analysts to predict near-term crude oil prices to top $75 to 100 per barrel.

The world consumes 83 million barrels of oil daily. Of that, the US alone consumes 20 million barrels daily. Here personal vehicles alone guzzle 65 billion gallons of gasoline and diesel fuel each year, and that number is projected to increase by 2.6 percent each year. The replacement rate of crude oil is less than the production rate. In 2004 the very best big oil company could replace only 89 percent of the oil that it produced. Then there is an escalating demand for oil from China and India in which China's demand is expected to grow at 7.5 percent and India's 5.5 percent compared to a 1 percent growth for the industrialized countries.

Fortunately, there are some hopeful signs of increased supply and lessening of demand pressure from future production of oil from tar sands and from shale. Canada, for instance, has the potential to produce between 50 to 60 billion barrels of crude from its tar sands.

The decreasing demand for gas-guzzling sports utility vehicles due to oil price spikes would siphon off some demand stress. China is shutting down antiquated plants and building 20 to 25 more efficient refineries whilst India is adding another 15 to 20. Once inventory replenishing is near its normal level and supply also resumes its normal pace, prices are expected to come down.

Unfortunately, many non economic factors may offset favorable supply and demand conditions thus contribute to oil price uncertainties. For example:

• Since a handful of the world's oil producers are concentrated in one region they can act as a cartel to dictate the terms on world oil markets and manipulate prices.
• These producers, having no accountability, use oil revenues to increase military expenditures, and thus destabilize regional balance.
• They use oil revenues as a means to maintain their hold on power including yielding to terrorists' pressures and thus are constantly exposed to insecurity.
• For energy and national security, US military presence in the region is inevitable. This adds more tensions and a deepening rift between the pro-American oppressive regimes and the oppressed.
• China's increasing arms sales to some Middle Eastern countries hostile to the US and its allies to ensure its access to oil will also add to tensions in the region.

All of these are prime precursors to substantial oil price uncertainty. However, until oil prices stabilize in the global markets, the government in Bangladesh may consider the following options:

• Oil prices should not be artificially suppressed and some form of traffic congestion tax following that of London (where traffic congestion was reduced by nearly 20 percent) and Stockholm (currently on trial until July 2006) be imposed. Windfall benefits are reduction of greenhouse gases and gasoline savings.
• Selling diesel fuel to farmers at subsidized prices is defensible, but selling gasoline to private automobile owners and businesses at prices less than cost (subsidized by taxpayer money) is not. Most people who pay taxes do not own and drive automobiles.
• Reacting to public pressure to hold down prices should be resisted as this would stop the economy adapting to a high oil price future.
• Government must let international price signals reshape the economic structure to minimise costs and maximise gains offered by oil scarcity and uncertainty.
• Allowing oil prices to rise and competitive pricing of other resources will economize on the use of oil.
• Price suppression is a form of price control which has adverse consequences as the country is experiencing now.

Supply and demand model predicts that price control will always culminate in hoarding, black market, and distorting allocations at the controlled price. So the experiences with diesel shortages and price uncertainties the farmers are coping with are simply a corroboration of that theory.

Many people think that Bangladesh is a free market economy. It is not. It is a mixed economy of the worst kind where bureaucracy gets involved everywhere and in everything. The outcomes are corruption, inefficiency, and waste. Bureaucracy is one of the primary reasons that many of the enterprises -- such as Biman, railway, telephone, and nationalized banks that ought to be privately owned but are run by the state -- are falling apart. The latest victim is the energy sector, the bloodline of an economy.

The author is Professor of Economics at Eastern Michigan University.