Is the world in the grip of yet another oil shock?
On March 8, the US announced a complete ban on Russian oil, liquefied natural gas and coal imports in a bid to deprive President Putin of the economic resources he uses to fund “his needless war of choice”.
The ban blocked any new purchases of Russian crude oil and certain petroleum products, liquefied natural gas and coal. It also banned new US investment in Russia’s energy sector, which it said will ensure that American companies and investors are not underwriting Putin’s efforts to expand energy production inside of Russia. And finally, it prohibited Americans from participating in foreign investments that flow into Russia’s energy sector.
Russia is the third biggest producer of oil in the world, behind the US and Saudi Arabia. And if Russian gas stopped flowing into Western Europe, already heated prices would increase even more. Russian gas accounts for about 40 per cent of the EU’s natural gas imports.
The text book definition of ‘oil shock’ is a sudden rise in the price of oil that is often accompanied by decreased supply. Since oil provides the main source of energy for advanced industrial economies in most places, a crisis can endanger economic and political stability throughout the global economy which is struggling to come out of a pandemic.
What were the earlier oil shocks like?
In the post-World War II era, there have been two major oil crises.
In 1973, Arab members of Organization of the Petroleum Exporting Countries (OPEC) imposed an embargo on supply to the US, Japan and Western Europe, for supporting Israel in the Yom Kippur war. These nations consumed more than half the world’s energy. Oil prices quadrupled to almost $12 a barrel. Although the embargo was lifted in 1974, oil prices remained high.
The Iranian revolution triggered the second oil shock in 1979 and the situation hit a nadir with the outbreak of the Iran-Iraq war (1980-88). In 1981, the price of oil stabilised at $32 per barrel.
How has the present crisis impacted the oil prices?
The current geo-political crisis involving Russia — the second largest exporter of oil and the largest exporter of gas — resulted in Brent hitting $140/barrel (14-year high) recently before settling down to $110 a barrel level. Though there may not be supply constraints in the long-term with incremental productions coming from other producing countries like Iran, Venezuela, OPEC members and the US, energy prices will remain volatile in the near term.
Is the world better prepared to tackle this crisis?
To an extent, yes. Many countries now also take bilateral commercial decisions based on their demand for fossil fuel. Also, today, the basket of oil and gas producers has expanded beyond a handful and therefore supply is no longer an issue. But what becomes an issue is logistics — transporting oil and gas — including financing it in an event of sanctions.
How has it affected India?
The Indian government has been taking up bilaterally with crude oil producing countries, OPEC and heads of other international fora to convey India’s serious concerns over crude oil price volatility. Since India’s import dependence from Russia for oil and gas has been very minor, no major supply-side impact is expected but what has adversely affected India is the price implications arising due to the ongoing conflict.
The price impact is two-fold for India — on its import bill, thus distorting the country’s fiscal math, and on the retail prices of auto and cooking fuel, making a dent in the consumer pocket.
How should India prepare to shield itself from future oil shocks?
The Indian government has been taking significant policy decisions for energy transition towards a net zero future. Recently, responding to America’s call, India had also committed to supporting initiatives for releases from the Strategic Petroleum Reserves for mitigating market volatility and calming the rise in crude oil prices. With the government taking all measures to ensure that alternate resources of energy and green energy become part of the basket, India may be better off in the long term in handling any geo-political strains. But the short-term implications of the ongoing geo-political conflict will be felt in India.