The impact of the Hamas-Israel conflict on oil and gas prices has remained limited so far. After a brief spurt when the price of the Indian crude oil basket rose by 9.5 per cent, it settled down to $87.23 per barrel close to the level ($85.66 per barrel) before the October 7 Hamas attack. The war is confined to the area away from the oil-bearing region of the Middle East. This could however change if there is a wider conflagration.

A major factor that has helped keep the oil price hike in check is the Saudi-Iran rapprochement. Without this, the geopolitical tensions would have affected shipping in the Gulf. A second important development was the statement of Hasan Nasrallah, the Hezbollah chief. He stated that the Hamas terror strike was ‘the result of a 100 per cent Palestinian decision.’ He distanced both Iran and his own organisation from Hamas’s actions. This has reduced the danger of Iran being drawn into the conflict.

The OPEC reduced production by 2 million barrels per day (bpd) in 2022, and an additional 1.3 million bpd in 2023. This coupled with an increase in oil demand by 2.4 million bpd in 2023 has kept the crude oil prices high. In the past, shale oil would have flooded in to take advantage of the market segment vacated by OPEC+. This year according to OPEC, the number of rigs has dropped by 143 by October as compared to last year. This suggests a slowdown in Shale oil production.

LNG price spike

There has been a sharp increase in LNG prices since the Hamas-Israel conflict broke out. The Asian LNG spot prices (Japan-Korea marker) went up by 32 per cent from $14.07 per MMBTU on the eve of the Hamas-Israel conflict to $18.59 per MMBTU on October 23. LNG prices are also affected by the ongoing conflict in Ukraine.

The EU has diversified from Russian piped gas to LNG supply from the US and other sources. The US exports now account for 50 per cent of the EU’s LNG imports. Though the LNG prices have come down since last year, they remain nearly double the pre-Ukraine war levels. As the EU seems to have decided to reduce its dependence on Russian piped gas, there is going to be long-term pressure on LNG supplies and prices. India needs to explore the option of bringing piped gas from the Middle East.

While global warming is supposed to slow down investment in fossil fuel extraction, major producers do not want to leave their resources below ground while the age of oil draws to a close. Hence, the attempt to boost the extraction of oil and gas as fast as possible.

The UN Secretary-General Antonio Guterres said that “Governments are literally doubling down on fossil fuel production; that spells double trouble for people and planet”. A Wall Street Journal article points out that UAE, the host of COP28, plans to boost its oil production from 4 million bpd now to 5 million bpd by 2027. The US oil production is expected to remain high at 19 million to 21 million bpd between 2024 and 2050. Its gas production will increase continually to reach 1.2 trillion cubic meters in 2050.

Top fossil fuel producers

The UN Production Gap Report 2023 includes India in the list of top 20 fossil fuel producer countries. While India indeed ranks second in coal production behind China, in terms of consumption it is far behind. China has a 50.5 per cent share of the world’s coal consumption, while India’s share is 11.3.

The UN report ignores the historical responsibility of developed countries and China who have exhausted 80 per cent of the global carbon budget. They also continue to eat into the meagre carbon space remaining at a much faster pace since their per capita consumption is higher. The report is right in concluding that the climate goals of major economies are not aligned with their fossil fuel policies. But there has to be more equitable burden sharing.

The pressure is building up to accept the peaking of emissions. The emissions of the EU and the US have already ‘peaked’; China will ‘peak’ in 2030. India will not be able to remain an outlier indefinitely. Capping of emissions before diversification to clean energy sources will seriously impair our development trajectory.

The ‘peaking’ levels are arbitrarily chosen. India needs to build up generating assets quickly before her emissions are capped. This can only be done on the basis of technologies that are commercially feasible now. The time for a decision is now.

The writer is a former Ambassador and has served on the Board of Directors of GAIL and was a senior Advisor to OVL