Petrol and Other Stories

The Government of India announced a 10% increase in the price of petroleum in the country a couple of days ago. The sharp spike in prices has shocked people – politicians, media, and the common man alike – into crying foul and debating subsidies, the government’s economic policy, and the impact of high petrol prices on an already belaboured economy. In this resultant hubbub, a more fundamental issue seems to have been entirely missed – the energy crunch.

The decade since the terrorist attacks on the United States on September 11, 2001, has seen oil prices (inflation adjusted) rise three-fold. While it is easy to blame the United States for causing the rise in oil prices by its invasion of Iraq and the nuclear stand-off with Iran, it would also be somewhat inaccurate. Although global political tremors (one always seems to focus on the Middle East, forgetting upheavals in Nigeria or Venezuela) certainly cause an upward surge in oil prices, the fact is that increased demand from China (48%) and India (32%), little increase in oil production by the Organisation of Petroleum Exporting Countries (OPEC), commodities trading, and a weakening dollar significantly dictate the final price. Add to that local taxes, whether set for populist measures or to encourage public transport. There is little that the government can do to change the global causes of high prices at the pump, and though taxes could be lowered, they’d probably be raised elsewhere as governments are wont to do.

In essence, then, the era of highly priced fossil fuels is here to stay. With demand only going up, India needs to start thinking about alternative fuel sources. Usually, this has meant CNG or LPG, and though this may reduce dependence on crude oil, it does not solve the problem of a massive energy imports bill. A better alternative, though still on the drawing boards in most countries, was implemented in Israel recently. Last week, Shai Agassi launched the world’s first electric car network (ECN) in Tel Aviv, and he is already planning to expand to Denmark. The concept of the electric car has been around since the late 19th century, but as advances in the internal combustion engine made petroleum cheaper, electric vehicles (EV) proved a short-lived interest. The 1973 oil crisis revitalised the idea, but as oil prices plummeted, interest waned again. The post-September 11 era is the third time interest has been rekindled.

There are a couple of hurdles to be jumped before the EV can become mainstream. One is the battery – electric vehicle batteries (EVBs) can easily cost up to 75% of the vehicle itself. Presently, costs per kilowatt-hour range from $500-700, and a 23-kwh battery, such as on the Ford Focus EV, can give you a range of about 120 kms without recharge. The good news is that many manufacturers are talking about the cost of an EVB to fall to below $200/kWh by 2015. There do exist EVs such as the Tesla Model S that can travel up to 480 kms on an 85-kWh battery, but they are beyond what the mainstream market can afford ($108,000). Also, contrary to popular belief, EVBs can last for a while – in real world use, Toyota RAV4 EV batteries have lasted 160,000 kms without degradation in their range. The second is the availability of recharging stations that would be necessary in any long-distance travel. Better Place, Shai Agassi’s firm, so far has only four charging stations in Tel Aviv right now, but with $400 million in their war chest, that number is set to ramp up within months. To give an idea of the scale of operations, India presently has approximately 37,000 petrol stations in operation. A third hurdle is the inability of the Indian government to provide enough electricity for the country without the added burden of tens of thousands of EVs.

Nonetheless, the ECN is an idea worth exploring. India’s oil import bill in 2011 stood at $130 billion, and with increasing demand and higher prices, it would be irresponsible not to investigate the proposal. For this thought experiment, let us heed Ratan Tata‘s advice (“You are stupid if you are not here”) and consider Gujarat as an example. The western Indian state is approximately 3.5 times larger than Israel and 7.5 times as populous. It also consumes approximately 1.4 billion litres of petrol per annum, 40% of Israel’s annual consumption of 3.6 billion litres. The average Indian drives approximately 15,000 kms per annum, and Gujarat adds 30,000 cars per year to its roads. If we assume that the average mileage of an Indian car is approximately, 15 km/l, that would mean that the annual consumption of petrol is 1,000 litres. At Rs. 84 per litre, the household spending on petrol would be Rs. 84,000. Let us assume that we want to reduce spending by a very ambitious 50%. This means that the annual petrol budget would be Rs. 42,000. At the highest electricity unit block, the cost per kW in Gujarat is Rs. 4.75. This means that the halved petrol budget can buy around 8,800 kWh. The Renault Fluence ZE, the first EV launched by Agassi on Israel’s ECN, has a 22-kWh battery that allows speeds up to 135 kmph and a driving range of 185 kms on a fully charged EVB. The 8,800 kWh annual fuel consumption would be tantamount to 400 full charges, giving an annual range of 74,000 kms, almost five times what our average Gujarati is driving now and at half the price. The enormous margin of gain provided means that even with electricity prices going up, EVB degradation, and Indian roads taking more out of the car than their Israeli counterparts, it would be safe to assume that EVs turn out far more cost-effective than traditional petrol-powered cars with the added benefit of less noise pollution and cleaner air. And the higher the price of petrol, the greater the savings.

Can Gujarat provide for this infrastructure? There are two components to the ECN – electricity and charging stations. In terms of electricity, even if 5% of the cars being added to Gujarat’s roads each year were EV, it would mean an increase in electricity consumption by slightly over 13 GWh. But this factors in driving 74,000 kms per year, not the usual 15,000 kms. Therefore, actual power needs would be around 2.7 GWh per annum if 5% of the new cars were EVs. Even at the 20% efficiency associated with clean energies such as wind power, this indicates a plant size of about 2 MW. While India is plagued by a power shortfall of over 10% (13% during peak demand), Gujarat is one of the few states that produces surplus power. However, the extra demand of even so few EVs will mean an expansion of power facilities, part of which can be subsidised by the savings from reduced petroleum consumption. Of course, there will be the cost of providing charging stations throughout the state, and the state will lose revenue accrued from taxes on petrol. In return, however, Gujarat (and India) would be a step closer to energy security.

Another problem with EVs entering the mainstream is that charging an EVB can take a long time, close to 3.5 hours as opposed to the ten minutes needed to fill a tank with petrol. Agassi solved this problem by swapping out the car’s depleted battery with a fully charged one available at the charging station. EV owners would pay only for the electricity they consumed, and a surcharge for the use of the charging station facility but the batteries would be owned by the corporation who owned the charging station. This would also make the cost of the EV more attractive to customers. The process of swapping batteries takes as little as five minutes, even less than it takes to get a tank of petrol.

As oil prices rise and are bound to rise even further, not to mention climate change and high pollution levels, the ECN is a tempting proposition if India can get its act together. Right now, the level of infrastructure required – EV manufacturers, EVB manufacturers, charging station owners, power plants – makes the idea of an ECN look like a rich man’s toy, but India is a huge market, and if the idea received official support, investors would not be hard to find. There are many who would vouch for Narendra Modi’s sense of purpose and commitment to sound policies and governance, and Gujarat has received international attention as the best-run state in India. The question is if Mr. Modi is willing to take on a new challenge, one whose potential benefits could change the face of India.

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This post was edited to reflect the reduced power usage as pointed out by Muthuraman N. My apologies for the oversight and thanks to him for pointing it out.