Energy and Security in South Asia

by Charles K. Ebinger

"Argues that mistrust, ethnic and religious sectarianism, and political parochialism among the nations of South Asia, a region of strategic geopolitical importance, prevent the region from achieving energy security, which is crucial for economic development and political stability. Recommends measures to improve energy security through domestic policy reform and more effective bilateral and multilateral cooperation"--Provided by publisher.

Energy and Security in South Asia

Energy and Security in South Asia

Cooperation or Conflict?
By Charles K. Ebinger

Brookings Institution Press

Copyright © 2011 THE BROOKINGS INSTITUTION
All right reserved.

ISBN: 978-0-8157-0431-7

Contents



Chapter One

Introduction to a Region on Edge

The 21st century cannot be an Asian century unless South Asia marches ahead and marches ahead together. MANMOHAN SINGH, prime minister of India, at the 16th South Asian Association for Regional Cooperation(SAARC) Summit, April 28, 2010

In December 1985, the heads of state of Bhutan, Bangladesh, India, the Maldives, Nepal, Pakistan, and Sri Lanka met in Dhaka, Bangladesh, and adopted the Dhaka Declaration, establishing the South Asian Association for Regional Cooperation (SAARC). While informal proposals for South Asian regional collaboration can be traced back to discussions in 1947 at the Asian Relations Conference in New Delhi, concrete proposals toward formalizing such cooperation gathered momentum only in the late 1970s under the leadership of the president of Bangladesh, Ziaur Rahman. Despite initial skepticism from the governments of Pakistan and India—both of which thought that the initiative was designed to rally the other member nations against their respective interests—the SAARC Charter was signed, igniting the flame for regional collaboration.

Despite the high hopes at the time, progress toward collaboration has been limited, with tangible results proving elusive not only for SAARC but also for a host of proposals involving free or preferential trade agreements, construction of cross-border natural gas pipelines, and electricity transmission.

Predictably, historic bilateral rivalries are the predominant reason why regional initiatives have failed to gain traction. The acknowledgment of the need for increased regional cooperation is not a dismissal of these rivalries as insignificant. To the contrary, they are rooted in historical disputes over land, religion, caste, clan, politics, and culture. Overcoming them will require determination, sacrifice, and, above all, patience.

South Asia is rapidly growing more insecure, and overcoming the obstacles to regional cooperation will be critical for the region's stability and growth. The more famous manifestations of this insecurity receive most of the media attention. They include devastating poverty; armed conflicts in Afghanistan and Pakistan; increasingly belligerent insurgencies in Pakistan, Nepal, and Bangladesh and large portions of rural India; the rise of religious extremists across the region; natural disasters (floods, earthquakes, and cyclones); and increasing water shortages as a result of, among other factors, global climate change. This book addresses a relatively underreported issue—energy security—that, if left unaddressed, may pose a greater challenge than all the other factors combined, as it tears South Asia asunder.

What Is Energy Security?

Although there is a vast literature and much discussion among politicians, academics, the media, the business community, and think tanks about what constitutes "energy security," there is no consensus on a definition. Consequently, it is vital that any work addressing energy security in a region as diverse as South Asia provide a working definition that can be critiqued by other scholars. The problem that arises, however, is that the concept of energy security depends on where in society one sits. At the most basic level, energy security means having access to the requisite volumes of energy at affordable prices. There is also an implicit assumption that access to the required energy should be impervious to disruptions: that alternative supplies should be readily available at affordable prices and sufficient with respect to both available volume and time required for distribution.

From the perspective of a government concerned with its macroeconomy and the management of its strategic interests, the above definition suggests the need for energy policies and standby measures that can be implemented in the event of a supply disruption to mitigate its impact to the greatest degree possible at a cost that its citizens consider reasonable. Such measures may include but are not limited to laws and financial incentives mandating that commercial or government-owned companies keep energy stocks that exceed their day-to-day needs or government strategic stocks of key petroleum products (gasoline, aviation fuel, and so forth). In addition, supply diversification by source, volume, and substitutable resources can contribute to an effective energy security program under such a definition.

In order to have energy security, governments must also be able to manage the macroeconomic effects of a major supply disruption. The latter includes price shocks, inflation, wide currency fluctuations, loss of jobs in energy-intensive industries, and/or changing patterns of global competitiveness brought on by a crisis. While some of these impacts occur in the short-to-medium term, others will affect the long-term health of a country if its government is not prepared to deal with the impacts of a crisis.

Enactment of such programs might provide some modicum of energy security, but they have often proved difficult to implement owing to the economic uncertainties of supply disruptions. Moreover, some argue that the effects of an oil price shock will have an impact on a country regardless of any preventive measures that its government takes: if it establishes a domestic price ceiling, it will create or exacerbate national deficits; if it relies on its oil equity abroad (for example, as India and China do) foreign governments may not allow the nation to keep the oil if they are confronted by massive shortfalls in supply for their own citizens.

From the vantage point of a private citizen, the definition of energy security is more nuanced and hinges on access to readily available resources in sufficient volume at affordable prices. Instead of being applicable to the macroeconomy, however, energy security is now applied to individuals and small enterprises. In South Asia, the latter category is overwhelmingly composed of farmers who need electricity to irrigate crops and run tube wells and natural gas to produce fertilizer. Access to energy is especially important during the harvest and planting seasons, when tube wells need electricity and machines need fuel.

Energy security in urban areas has yet another meaning. While the tariff structure for electricity consumers in cities varies widely throughout South Asia, in general residential tariffs are subsidized at the expense of large-scale commercial and industrial consumers. Rapid urbanization, growing populations, and rising middle-class incomes have led to explosive growth in electricity demand in Pakistan, India, Bangladesh, and Nepal. Brownouts (periods of reduced or intermittent electric service)—and blackouts have become commonplace, and some cities are powerless for twelve to sixteen hours a day. That has encouraged political demonstrations and sometimes violent protests. Politically motivated extremists and insurgencies in Pakistan (Taliban), India (Naxalites), Nepal (Maoists and regional separatists in the Terai), and Bangladesh (Islamic fundamentalists) have succeeded in using power outages to present an additional example of their respective government's ineptitude and, in turn, to bolster their own political platforms. In Lahore in December 2010, despite assurances that there would be no load shedding—the selective disconnection of service areas due to lack of electricity supply—during a religious holiday, load shedding averaged two to three hours, sparking protests.

For the poor in most South Asian metropolises, the energy security situation is different still. With precious little disposable income, most of these people use very little electricity, except as needed for a few light bulbs for their shops, homes, or tents; they use kerosene for lighting and charcoal, biomass, or wood for cooking. Energy security for such communities has profound implications. Because electricity allows water to be drawn by mechanical pumps, bringing electricity to villages empowers women and girls by eliminating the hours of arduous labor that they spend carrying water to their homes over difficult mountainous terrain. In Nepal, for example, with more time available, women and girls often start cottage industries, using the new source of energy to set up bakeries, canteens, and weaving enterprises, thereby adding to their household income. More free time allows children to study into the evening hours, when previously the village had gone dark. The availability of electricity allows medical operations to occur at night and vaccines to be refrigerated. Refrigeration also allows harvested crops to be preserved in storage until delivery trucks arrive, when previously a landslide, an unexpected storm, or a mechanical problem could mean financial ruin because crops could not get to market and rotted in storage or in the fields.

The South Asian Political Milieu

Today, the Indian subcontinent can ill afford the instability brought on by energy insecurity. Nowhere in the world is the intersection of booming populations, rampant poverty, and domestic and interregional religious, ethnic, and political conflicts as chaotic or as combustible as in the Subcontinent. There are myriad points of friction: internal political insurgencies throughout much of rural India, Pakistan, and Bangladesh; continued political instability in Nepal that can ignite social unrest at a moment's notice; tensions along the India-Pakistan border as the two nuclear powers tussle over Kashmir; India's concern over terrorist organizations in Pakistan and conflicts over India's presence in Afghanistan; and government attempts in New Delhi, Islamabad, and Dhaka to dam expanding pools of religious chauvinism. There is also China's emergence as an alternative to India for trade and protection among other countries of South Asia, which many Indians see as a direct threat to New Delhi's regional supremacy and which leads some Indians to question the intent of China's diplomatic and economic forays into South Asia.

A number of exogenous factors contribute to and aggravate the intra-and interregional turbulence. In addition to global economic disruptions—such as the oil price shocks in 1973-74, 1979-80, 2005, 2008, and 2011—South Asia is also affected by annual monsoons that, while providing the lifeblood for the region's agricultural economies, can also prove disastrous. If the monsoon season is especially ferocious, it can cause floods, ruin crops, kill animals, destroy homes, and displace hundreds of thousands of people—as was clearly demonstrated in Pakistan in 2010. Parts of South Asia also suffer from droughts and growing desertification. As was the case in Maharashtra and Bihar in the 1970s, droughts can cripple the agricultural sectors responsible for the employment and sustenance of millions of people. Moreover, a changing climate poses potentially cataclysmic challenges for the Subcontinent. Maplecroft, a U.K.-based consulting firm, reported in 2010 that Bangladesh, India, and Nepal are three of the four countries most at risk from the impacts of climate change, which include coastal flooding, encroaching deserts, deforestation, and melting glaciers in the Himalayan and other mountain basins.

At the heart of many of these issues is the suffocating poverty that plagues the region. Despite enjoying several years of impressive economic growth (with more growth projected, according to many economists), the Subcontinent is still as well known for its teeming slums as for its modern industrial centers. Yet while poverty alleviation is a widely acknowledged long-term goal for countries throughout the region, energy security is often overlooked by foreign policy, national security, and economic planners and experts alike as a lynchpin for social, economic, and political stability.

This oversight is puzzling, as the development of adequate energy resources is essential to economic vitality and the ability to raise and maintain living standards in every country in the world. Indeed, the importance of energy is arguably greater in poorer countries than in industrialized ones. Given the state of their economic development, most South Asian countries need energy consumption to grow at a rate faster than GDP. Put simply, in those states, rapid energy growth is a prerequisite of even moderate economic growth. While the ratio of energy consumption growth to GDP growth can fluctuate depending on macroeconomic performance in an individual economy, on balance, this relationship holds until more advanced stages of economic development.

Against this backdrop, South Asia confronts a devastating energy shortage. Long plagued by ineffective governments that have implemented impotent policies, large swaths of the population have had minimal—if any—access to modern forms of energy, relying instead on wood, sticks, brush, animal waste, and agricultural residues for heating and cooking. Only as a result of economic progress in recent decades have South Asian populations slowly shifted from using these traditional noncommercial sources of energy to commercial sources such as coal, petroleum products, natural gas, nuclear energy, and renewable sources such as hydropower, wind, and solar energy. Despite this trend, hundreds of millions of people across South Asia continue to use noncommercial energy resources to meet their daily energy needs. With demand surging and commercial energy sources in limited supply, the threats to economic growth and stability are abundantly clear.

Challenges and Choices

The countries of South Asia face a stark dilemma: If they do not modernize their energy supply to meet accelerating demand, they remain static and undeveloped. On the other hand, if they bring economic development opportunities to the masses, they exacerbate their energy supply crunch. Across the region, the balance between supply and demand in the energy sector is, more than ever, under strain. Energy demand is rising unchecked, stimulated by economic growth, population growth, urbanization, and subsidized prices. Yet governments have a poor track record in creating policies to manage rising energy demand. The Subcontinent suffers from a relative dearth of oil and natural gas resources. Furthermore, in spite of the region's extensive coal resources, the industry is plagued with problems. The inferior quality of Indian coal makes it subject to spontaneous combustion during shipment, and much of the coal has a high ash content, thus contributing to air and water pollution, CO2 emissions, and crop damage. In Pakistan, while there are vast coal deposits, the coal is often in inaccessible regions and is also of poor quality. Because of the lack of sustainably exploitable domestic resources, the region is heavily dependent on high-cost coal and petroleum imports (see figures 1-1 and 1-2). To mitigate the financial impact of expensive energy goods (and to appease a variety of social, economic, and political interests), the region's governments have enacted a range of costly energy subsidies and cross-subsidies for end-use consumers. Some of the subsidies, such as low well-head prices for oil and gas, have in turn created an inhospitable commercial environment for investing in the development of new resources.

The aforementioned symptoms highlight a failure of domestic policymaking. Governments across the region have failed to establish policies for long-term, sustainable energy production and consumption. Despite the different circumstances of the individual countries, there are clear common themes in their policy missteps, the most prominent of which is the failure to establish adequate pricing signals to encourage efficient consumption and future investment in the energy sector. In India, Pakistan, and Bangladesh, this is most evident in the natural gas sector. Decades of subsidies for domestic fertilizer production and electricity generation have not only depleted existing reserves but have also discouraged private sector investment from developing new fields—although recent price reforms in India have accelerated the momentum toward natural gas price "normalization." In contrast, in Pakistan recent attempts by the government to raise petrol prices led to riots in several cities, forcing the government to rescind the proposed increases.

Eliminating these costly subsidies is essential, as governments will at some point discover. And while raising the price of energy is always politically challenging, on the Subcontinent, where the members of what is arguably the most important voting bloc (the low-income classes) rely on subsidies for their basic livelihood, it can be political suicide. It is imperative that policymakers understand the delicacy of pricing reform and adopt a nuanced approach to energy pricing. Subsidies should be eliminated for higher-income groups—wealthy farmers in particular, who often waste the free electricity and cheap fuel provided to them—but they should be maintained, at marginally higher levels, for poorer segments of the population.

(Continues...)



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BOOK DETAILS

Full Title: Energy and Security in South Asia: Cooperation or Conflict?
Author: Charles K. Ebinger
Publisher: Brookings Inst Pr
Date Published: August 31, 2011
Copyright Year: 2011
Format: eBook, Blio
Feature: Text to Speech Enabled
Platform: XPS Enabled
Length: 224 pages
Language: English
ISBN: 0815704313 / 9780815704317
Categories: Politics & Government / Political Freedom & Security / General
Politics & Government / Government / International
Politics & Government / International Relations / Arms Control