China Bets Highways.. What's India betting on?

China is betting on infrastructure (read roads) spending to overcome the downturn in the economy (http://online.wsj.com/article/SB122635482375915243.html). Every major economy in the world has announced government spending. But, I am yet to hear anything from Indian government about any ideas that they have. I suspect that the establishment is again planning a passive/lagged role in dealing with the slowdown in the Indian economy.

Why don't these guys understand that India in changing and needs a changed approach (read aggressive) too. We are sitting on a very healthy forex numbers and have all the ability to increase the government spending. Also, there is not dearth of spending opportunities. Government can announce billions in spending on IT, roads and agriculture.

Government spending in IT has become the utmost important thing today in India. If India has to deal effectively with the monster of curruption then they have to go the IT way. The best part is that India already has IT behemoths and we don't need to look out side for help.

Golden Quadrilateral is probably the best government supported infrastructure development that India has seen in my lifetime (~ last 25 years). Mojority of these roads are of really good standard and are in some sense comparable to the 'interstates' in USA. The development should now be taken to the next level with good connectivity between small towns. Most of the towns are living in a real miserable state and a good transport system is neccessary for the development and prosperity to trickle into these place. Remember, that it's in these towns and villages that India resides.

India needs a second green revolution. And this new one should not remain confined to just two states (it was only Punjab and Haryana last time) but should take place in whole of India. Also, the curbs that governments have put on the retail chains (like the one on Reliance Fresh stores) should be done away with. These retail chains are the only hope for Indian farmers today and all that the govt needs to do is.. well they don't need to do anything.. they just don't need to disturb the private sector here. The competition among the retail chains will ensure that the Indian farming scene becomes more efficient and productive.

And the biggest thing of all (how could I miss this one) is the government support/spending for energy sector. I have already spoken a lot on the importance of the sector and there can be nothing urgent than this.

Energy Crisis

Some of my friends were confused with what I said in few of my energy related posts in pasts. This one is just to clarify some of them.

First and foremost, I am concerned about India's growth and economy. Two resources that matter the most are Energy and Knowledge.

Saying that the current energy scenario in India is dark should not come as a surprise to anyone.
We have not been working hard to develop new power plants, neither hydro nor thermal, forget about nuclear plants.
There is no electricity in small towns and villages where more than seventy percent of Indians live. It is unfair to expect those children studying without electricity to come and take India forward. It is our responsibility as a society to provide those basic necessities.
How can we expect to become a super-power when we are on the mercy of whims and fancies of some nations (whose only way to make money and prosper is through selling energy)?

Current status of energy sources in India are not even capable of sustaining the present level of economy, look how it comes falling down with the fuel price-rise, which is totally under the control of others. I am of the opinion that India should start to look at all other available options in an urgent fashion. Nuclear deal with US is just one small step, though a laudable one. No other PM in last 15-20 years ever had the courage to take such a step in the interests of India, knowing very well the precarious condition of the government (though I cannot comment on the way government was saved).

Energy Watchdog Warns Of Oil-Production Crunch

Wall Street Journal today reported that IEA, the Paris based International Energy Watchdog is taking up study to reassess the global oil supply and reserves.

http://online.wsj.com/article/SB121139527250011387.html

Highlights

• The world's premier energy monitor is preparing a sharp downward revision of its oil-supply forecast, a shift that reflects deepening pessimism over whether oil companies can keep abreast of booming demand.
• For several years, the IEA has predicted that supplies of crude and other liquid fuels will arc gently upward to keep pace with rising demand, topping 116 million barrels a day by 2030, up from around 87 million barrels a day currently. Now, the agency is worried that aging oil fields and diminished investment mean that companies could struggle to surpass 100 million barrels a day over the next two decades.
• "The oil investments required may be much, much higher than what people assume," said Fatih Birol, the IEA's chief economist and the leader of the study.
• The IEA, employing a team of 25 analysts, is trying to shed light on some of the industry's best-kept secrets by assessing the health of major fields scattered from Venezuela and Mexico to Saudi Arabia, Kuwait and Iraq.
• Goldman Sachs grabbed headlines recently with a forecast saying that oil could top $140 a barrel this summer and could average $200 a barrel next year.
• Last summer, the agency warned that OPEC's spare capacity could shrink "to minimal levels by 2012." In November, it said its analysis of projects known to be in the works suggested that the world could face a shortfall by 2015 of as much as 12.5 million barrels a day, unless there was a sharp drop in expected demand.
• "This is very important, because the IEA is treated as the world's only serious independent guardian of energy data and forecasts," says Edward Morse, chief energy economist at Lehman Brothers.
• U.S. Energy Department also has embarked on its own supply study, which it hopes to complete this summer. Like the IEA, its preliminary findings are somewhat gloomy: They suggest daily output of conventional crude oil alone, now about 73 million barrels, will plateau at 84 million barrels.
• A study released earlier this year by the Cambridge Energy Research Associates, a consulting firm and unit of IHS, concluded that the depletion rate of the world's 811 biggest fields is around 4.5% a year. At that rate, oil companies have to make huge investments just to keep overall production steady. Others say the depletion rate could be higher.

Oil Mania

first draft

Peak Oil: Wikipedia define Peak Oil as "Peak oil is the point in time when the maximum rate of global petroleum production is reached, after which the rate of production enters its terminal decline."

Source: http://en.wikipedia.org/wiki/Peak_oil

As we all know that petroleum is a non-renewable and the supply is limited. In past, new technologies and new discoveries of petroleum deposits have enabled us to increase our global production daily (it is needed for the daily increasing demands). But, a day will certainly come when any amount of technology will not help us in increasing the production and new discoveries will become rare. That is when the petroleum production will start declining. This max production is termed as 'Peak Oil'.

From this hypothetical point (Peak Oil) the production will decline while the demand will continue to rise. If not handled properly it can result in a big global crisis.

Suspicious Data
The biggest problem the world faces in correctly accessing the date of this peak oil is the incorrect data being published by the Organization of Petroleum Exporting Countries (OPEC is the association of major oil exporting countries, there are few smaller exported not part of the assoc) members. Following table shows the oil reserves of various OPEC members over the years

Declared reserves with suspicious increases in bold purple (in billions of barrels) from Colin Campbell, SunWorld, 80'-95
Year	Abu Dhabi	Dubai	Iran	Iraq	Kuwait	Saudi Arabia	Venezuela
1980	28.00	1.40	58.00	31.00	65.40	163.35	17.87
1981	29.00	1.40	57.50	30.00	65.90	165.00	17.95
1982	30.60	1.27	57.00	29.70	64.48	164.60	20.30
1983	30.51	1.44	55.31	41.00	64.23	162.40	21.50
1984	30.40	1.44	51.00	43.00	63.90	166.00	24.85
1985	30.50	1.44	48.50	44.50	90.00	169.00	25.85
1986	31.00	1.40	47.88	44.11	89.77	168.80	25.59
1987	31.00	1.35	48.80	47.10	91.92	166.57	25.00
1988	92.21	4.00	92.85	100.00	91.92	166.98	56.30
1989	92.20	4.00	92.85	100.00	91.92	169.97	58.08
1990	92.20	4.00	93.00	100.00	95.00	258.00	59.00
1991	92.20	4.00	93.00	100.00	94.00	258.00	59.00
1992	92.20	4.00	93.00	100.00	94.00	258.00	62.70
2004	92.20	4.00	132.00	115.00	99.00	259.00	78.00

Let's analyze the table closely. Focus on the Saudi Arabia column (they have around 25% of the world's oil). In 1990 Saudi Arabia increased its estimates from 170 to 258 billion barrels. The most surprising part is that such a huge increase in reserves came without any major oil discovery (This is not the first time that they have done so, they did the same thing by revising their estimates from around 100 billion barrels to 160 sometime around 1978). They can do this because they do not allow any third party evaluation of their reserves. You have to believe what they tell you. This is not the end of the story. From 1990 to till date their reserves have been pretty much the same, even though they have been selling around 4 billion barrels every year. So, you see it. The reserves increased to 160 from 100 after they closed down their oil wells to foreign inspections, it remained at the same level for 20 years and then all of a sudden it again jumped by a whopping 50% and has been there since 10 years.

The table show that pretty much all the nations have followed Saudi Arabian strategy. So, what is the reason/motivation behind the move. According to OPEC rules each member can export oil according to the ratio of their declared reserves. So, you see!! this is why everyone is trying to beat others in the faking game. There is no way now to gauge the correct amount of global reserves from the declared official sources.

During, the Hurricane Katrina days when the oil prices were zooming, Saudi Arabian government promised US that they will increase the production to make up for the lost production in US (Gulf of Mexico). Even after trying their best, the saudis could not increase their production by any significant quantity which pretty much blasted off all their oil reserves propaganda.

The Big Question: Timing of Peak Oil

Estimates of the Peak Oil timings range from 2005 (yes, few believe that we have already seen it) to 2040. According to 2008 estimates of Association for the Study of Peak Oil and Gas (ASPO) the global oil production will peak in 2011.

Even the big guns have now started accepting the fact that we are nearing the dreaded thing.

Former US Energy Secretary Dr James Schlesinger said in an interview that the
intellectual arguments over peak oil had been won, and that in effect
'we are all peakists now'. (http://www.davidstrahan.com/blog/?p=42)

What does it mean?

Peak Oil doesn't mean the end of oil. But, it signifies the start of ever-increasing prices of oil which has the potential to dislodge the whole countries and economies.

Effect on US
The increase in prices are definitely going to effect the US economy. But, US still has it oil deposits in form of shale-rocks. The process to extract the oil from these shales is not a easy one. You have to drill to 3000 meters and then drill horizontally to extract oil. The process had not been financially viable and therefore the shales have remained pretty much untouched. The cost of production from shales is around $35-40/barrel. Since, the prices are already at $120/barrel, it should now be a viable option and we can see companies flourishing there in some years. Those production from there are expected to peak in around 2040. So, it will keep US running till then. To me this strikes as the biggest reason for the US governments dis-interest in alternative energy researches.

Effect on Russia
Russian economy is currently booming because of oil and will continue to boom as the oil prices will continue to shoot up. Russia is good for another 20-30 years.

Effect of China
China lacks oil deposits. But, chinese have been aggressively acquiring oil, gas and coal reserves throughout the world out-bidding India everywhere. China has literally gone on a buying spree in Africa. Most of the countries including Sudan, Chad, Nigeria, Angola, Algeria, Gabon, Equatorial Guinea, and the Republic of Congo have sold off to China. China uses aid-for-oil, selling arms and other financial aids strategy to forge its relationships. (http://www.cfr.org/publication/9557). In short, China is very aggressively working on its future energy requirements though, it still doesn't look very safe.

What's India doing??
hmm.. big question. India too is working hard to procure oil and gas fields in Africa and unfortunately has been overbid by China everywhere. India has also been trying the nuclear way but the leftists won't allow that. The Nuclear Deal with US will help India get the technologies and more so get Uranium (nuclear-fuel: very little Uranium deposits. India is unfortunate here too). It is expected to fulfill around 5% of India's requirements. So, with no nuclear deposits and no petroleum deposits, what options does India have when oil prices go beyond the affordability limits (no later than 2020, could even be earlier)? The Indian government lacks visibility on the front. The Indian economy is set for a doom unless the leadership takes some bold steps.

Overall Effects:
Of the four big economies Russia is in the safe zone with its huge petroleum deposits. US expects to manage with the costly oil from shales. What about India and China?
As I earlier pointed out the US reluctance to invest in alternative energy sources. This may be (or may not be) a well planned strategy. The competitive advantage that China is enjoying now may reverse because of the energy imbalance and US is all set to benefit from it. US can then increase its focus on the research for alternative sources.