Rising oil, lack of strategy put India in a spot

If any proof was needed to show how fragile and vulnerable we, as a nation, are in terms of energy security, the recently-concluded India Energy Forum provided it publicly. It is well-known that India’s dependence on imported crude oil has worsened over the years and currently stands at close to 80 per cent.

We import over 200 million tonnes annually and spend approximately $80 billion. Every $1 rise in crude oil price in the global market sets us back by over $1.5 billion, and in recent months world prices have escalated to over $80 a barrel (doubling from rates this time two years ago) on account of a combination of factors including geopolitical tensions, sanctions, and of course, flow of speculative capital.

Volatile markets

Crude oil is after all a commodity; and commodity markets are, by their very nature, volatile. So, we cannot wish away volatility and price swings. Commodities are indeed an asset class and attract speculative investors. Such investments exert an exaggerated effect on prices. The strong positive correlation between economic growth and energy consumption is well-recognised. Energy fuels economic growth. As the economy expands, energy consumption expands; and it has been our boast that India is the world’s fastest growing significant economy.

Lack of policy

As a nation, we have clearly lacked a strategic action plan to overcome the alarming and highly-risky dependence on crude oil imports. Far from being an overnight phenomenon, such dependence on imports has been gathering pace over years. Yet, only superficial attention was paid to augment domestic production or explore alternatives such as non-conventional energy sources.

At the conference, statements of some Indian ministers were plain hilarious. Attacking the so-called monopoly in the crude oil market (observers know there is no monopoly as such in the world crude oil market with numerous producers big and small), the Petroleum Minister has reportedly said India should not be pushed into a corner and that ‘we will find a way out’. Such bluster will not be taken seriously by anyone.

If anything, the minister must explain if he knows ‘a way out’ and ‘what is that way out’. Surely, it cannot be a State secret. The reality is, India has no control or influence over the global crude market.

OPEC, non-OPEC supplies

The oil price situation in India is worsened by the rapid depreciation of the rupee. In other words, the country is facing a ‘double whammy’ of rising crude oil rates and falling rupee value which makes imports even more expensive. The government’s strategies to shore up the rupee have shown no marked impact so far.

Meanwhile, there is some consoling news for Indian policymakers. Together with OPEC’s statement that the oil market is adequately supplied and well balanced, the International Energy Agency’s latest forecast suggests the oil market is most unlikely to rise to $100 a barrel, subject to the caveat that the recent friction between the US and Saudi Arabia does not escalate.

While non-OPEC supplies are rising sharply, global demand growth is weakening. In the first quarter of 2019, there could be sizeable supply surplus, despite the possibility of a fall in exports from Iran.

The next meeting of OPEC is slated for December 6. Some observers even speculate that OPEC may discuss a cut in oil output because of the price outlook.

The writer is a policy commentator and commodities market specialist. Views are personal.

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