Policy analysis of oil substitution by natural gas in India: Transport and industry sectors

Abstract

Diesel and fuel oil are the two major petroleum products consumed in the Indian economy. They are predominantly used in the transport and industry sectors. Both of these products can be partly substituted by natural gas (NG), which is indigenously available. The paper explores levels of substitutions that should be planned for diesel by compressed natural gas (CNG) driven vehicles and for fuel oil by natural gas. Such an approach would require maximization of consumers' and producers' surplus so that economic costs to the country and financial costs to the users are realistically assessed. It is shown that when international crude prices and refinery margins increase, the natural gas allocated to the transport sector increases, followed by the industry sector. This leads to savings of US$ 460–3700 million for crude price of $14 per barrel to $32 per barrel respectively. Such a strategy would require a vehicle programme of 100 000 to 250 000 CNG vehicles ie 4.6–11.5% of total vehicles to be converted to CNG by 2000.