Never bet on crude oil prices, particularly when you are a major importer, is what every expert says. And this holds true for India being one of the major importers. In a surprise move, earlier this month Saudi Arabia and other OPEC+ members announced voluntary production cuts of about 1.15 million barrels a day, effective May. According to them this was aimed at supporting market stability.
Why have they taken such a decision when the group of oil-producing nations had been largely expected to stick to its already agreed 2 million barrels a day cuts taken last year.
OPEC+ comprises the Organisation of Petroleum Exporting Countries (OPEC) and allied producers led by Russia. This was formed in 2016. The 10 countries now in OPEC+ include Russia, Kazakastan, Azerbaijan, Mexico and Oman.
No sooner had this decision been made, US Treasury Secretary, Janet Yellen, termed it an “unconstructive act”, which could hurt US efforts to lower inflation.
For India, any oil price spike is not good given that it has direct impact on its import bill. The Indian crude oil basket (the price at which Indian refiners source their crude oil), as on April 12, stood at $86.21 a barrel. New Delhi has been raising issues such as high prices, high volatility and Asian premium faced by it and other consuming countries at various international forums.
According to BP Stats 2022, India is the world’s third largest consumer of oil and LPG, and the fourth largest LNG importer, refiner. It is also the fastest growing major energy economy. BP Energy Outlook and International Energy Agency estimate that India’s energy demand would grow at about three per cent per annum till 2040, compared to the global rate of one per cent. Further, India is likely to account for around 25 per cent of the global energy demand between 2020 and 2040.
So what has India done to protect itself from oil price volatility? According to the government, various long term and short term policy initiatives have been undertaken to increase oil and gas production, reduce import dependency, besides focusing on green energy.
But, are these enough? Why is there no concrete policy to avoid such uncertainties? What is the status of Strategic Petroleum Reserves?
As Probal Sen, Energy Analyst, ICICI Securities, puts it “not much we (India) can do except what we have been doing on retail pricing.”
If crude oil prices are at these levels then it is still manageable, he said, adding that “earlier we have seen product prices also expanding very sharply, then there is a concern. At present, the spike in crude oil prices is because of the fear of supply constraints, but what is helping is that demand has not picked up and product prices have not kept pace with crude oil prices. The oil marketing companies are making profit, currently.”
At the macro level, Sen feels we can negotiate more aggressively with Russia as the savings in the import bill in the context of discounts being spoken about for Russian crude have not been much.
According to MK Surana, former chief of Hindustan Petroleum Corporation Ltd, “Price volatility and unpredictability are inherent part of oil business. Not all the time it is due to pure supply-demand metric. A number of other factors, which include organised production cuts by major producers, geopolitical issues, perceptions on the economy, reduced investments in upstream sector in recent times, current energy transition narrative, in addition to internal economic and political factors of individual countries, have a bearing on oil prices.”
“Volatility on either side beyond a range is bad for both consumers as well as the producers. Almost all the consuming countries not only India have been troubled by this,” he said.
Multipoint approach
According to him “India can cushion itself to some extent by taking a multipoint approach which include diversifying its energy basket to include and enhance the use of alternative energy sources, broad-base its oil and gas supply sources, enhance domestic production and promote more efficient use of energy. India is working on all the above.”
According to Vandana Hari, Founder and CEO, Vanda Insights, “Today, India is the biggest energy consumer with the fastest-growing rate of demand. Demographic, urbanisation and general economic projections all point in the direction of this trajectory continuing at least into the next decade. One can hardly overstate the importance of the country becoming more proactive in buffering itself against international market volatility to the extent it is possible, especially in oil, where imports satisfy over 80 per cent of domestic demand.”
“The strategy has to be multi-pronged. I would say accelerating the diversification of the energy mix, promoting energy conservation and efficiency measures, and boosting strategic oil reserves to at least 90 days worth of net imports, like in the OECD countries, are the three key pillars,” she said.
Talking about strategic reserves, according to the government, the current capacity of the Strategic Petroleum Reserves facility is 5.33 million tonne, which is estimated to meet 9.5 days of crude oil requirement. Crude oil and petroleum products available with oil marketing companies (including their capacity at Strategic Petroleum Reserves) can provide for about 77 days’ requirement , based on the net oil imports of April-December 2022.
In the Ministry of Petroleum & Natural Gas Demands for Grants (2023-24) report, the committee has recommended the creation of more Strategic Petroleum Reserves capacity in a time-bound manner across the country, particularly mini or small caverns wherever geological conditions are favourable. It also suggested that the Ministry explore the option of giving responsibility to OMCs/refineries to operate and maintain the caverns while the Ministry bears the cost of construction.
While India will still have oil as major energy resource for reasonable time, to cushion itself from global impacts it will need to make use of all types of energy sources to meet the growing demand.