With Russia launching a widely anticipated invasion of neighbouring Ukraine, a barrel of crude oil has shot past the US$ 105 mark for the first time since 2014, the year in which the seeds of the present conflict were sown with Russia’s annexation of Crimea. Russia is the second biggest seller of oil by volume behind Saudi Arabia and the price rise was more or less expected.
The price of oil has been on a steady upward course along with the gradual recovery of the world from the Coronavirus pandemic, after plunging to historic lows during the pandemic-induced lockdowns. This has become a “crude shock” so to speak to countries that are net importers of oil, such as Sri Lanka which usually spends around US$ 6 billion per year for fossil fuel imports.
The Ukraine conflict and the attendant oil price hike could not have come at a worse time for Sri Lanka, which is struggling on the economic front with a deep foreign exchange crisis. The country’s foreign reserves are down to less than US$ three billion, with a US$ four billion foreign loan obligation looming ahead. The country needs around US$ 500 million to import one month’s fuel supplies alone.
For the moment, India has come to the rescue with a Line of Credit for fuel purchases up to that amount and it has already supplied 40,000 MT of fuel to Sri Lanka.
Sri Lanka is negotiating with several other countries for fuel purchases and avenues to boost foreign exchange reserves. In the meantime, foreign exchange has been secured for fuel ships that are already at the Colombo Port awaiting discharging to local oil storage facilities. While there is a fuel shortage at the moment as people have resorted to panic buying, the situation should ease over the next couple of days.
But transport is only one aspect of the overall scenario. The country is also suffering from a power crisis, mainly as a result of a lack of fuel for the fossil fuel thermal power plants as well as the lack of water for the hydropower plants due to the prevailing drought. There already are daily four-hour power cuts, though attempts have been made to minimise the inconvenience caused to GCE A/L students.
There have also been calls to minimise or spare power cuts to tourism zones such as the Southern coastal belt, as tourism is once again picking up the pieces after the Easter attacks and the Covid-19 pandemic. If the drought is prolonged and fuel supplies are hampered, however, the power cuts might have to be extended.
The Government has so far resisted calls to increase the pump prices of fuel at Ceylon Petroleum Corporation (CPC) filling stations, although the Lanka Indian Oil Company (LIOC) recently raised its prices citing the present world market trends. The Government is well aware of the cascade effects of such a fuel price hike, which will affect everything from the price of a lunch packet to vegetables. Nevertheless, it is doubtful whether it can hold on to the present prices for much longer, given the escalation of the Ukraine conflict.
The only answer to the present crisis, at least in the medium to long term, is switching over to renewable energy for both transport and power. In the light of the economic crisis, the Government has prudently halted the import of vehicles in order to save foreign exchange, given that around US$ 1.5 billion is spent per year for vehicle imports. But this cannot be a long term solution as there is a soaring demand for new vehicles. Moreover, under World Trade Organization (WTO) rules, we cannot be perpetually closed off to imports.
But once vehicle imports resume probably next year, there is a clear choice: we have to go electric. Virtually all carmakers now have fully electric cars in their line ups and most of them will only offer electrics from around 2025. Concessions and incentives should be granted for the import and purchase of electric vehicles, which have the added benefit of not polluting the environment.
The Government should take the initiative to install fast DC superchargers around the island. Solar charging points must also be encouraged, lest people draw AC power from the national grid to recharge their vehicles, which negates the whole point of having an electric car.
The Government must also expedite the construction of renewable energy power plants in collaboration with the private sector.
Sri Lanka’s geographical location is ideal for both solar and wind power plants and we should also explore the possibility of having new technologies such as geothermal and ocean wave energy. The Government already has a goal of achieving 70 percent of power from renewables by 2030 but this date should be brought forward in the face of the current fuel crisis. For example, if every household gets a rooftop solar panel by 2025, one can just imagine the shaving of the burden from the national grid.
It is also imperative that the regulatory and approval process for renewable energy projects is simplified, probably under the aegis of the Sustainable Energy Development Authority.
Right now, some investors in this sector are driven from pillar to post and it takes months to get an approval, if at all. Some investors have abandoned the projects or even left the country in frustration.
We should study the regulatory frameworks of countries such as Germany that have achieved 100 percent reliance on renewable energy and learn any relevant lessons. The sooner we switch over to renewable energy, the better it is for our environment and our coffers.