The cost of the Indian basket of crude, which averaged $47.56 and $56.43 per barrel in FY17 and FY18, registered an average of $57.77 in December (Mint)
The cost of the Indian basket of crude, which averaged $47.56 and $56.43 per barrel in FY17 and FY18, registered an average of $57.77 in December (Mint)

Global oil market unaffected by rising Indo-Pak tension

  • Any spike in international crude oil prices will affect India, given that the country’s energy needs are primarily met through imports
  • Every dollar increase in the price of oil raises the import bill by around 10,700 crore on an annual basis

New Delhi: The Indian Air Force strikes against terror launch pads in Pakistan have had no bearing on the global oil market, with experts of the opinion that any impact is unlikely.

Any spike in international crude oil prices will affect India against the backdrop of factors such as the Organization of the Petroleum Exporting Countries (Opec) and Russia cutting supplies, the US administration imposing sanctions on state-owned oil company Petróleos de Venezuela SA (PDVSA), and President Donald Trump pulling the US out of a historic 2015 accord with energy-rich Iran that was signed to curb the Islamic Republic’s nuclear programme in return for ending sanctions.

“Both WTI (West Texas Intermediate) and Brent are down right now. So the oil market doesn’t even view this as an important incident," said Debasish Mishra, leader, energy, resources and industrials, at Deloitte Touche Tohmatsu in India.

Indian strategic planners have been worried over short-term supply disruptions, given that the country’s energy needs are primarily met through imports.

“The South Asian nations share common geographical sourcing points. Any efforts by Pakistan to create choke points will be inconsequential," said a New Delhi-based energy expert who did not wish to be named.

India, the world’s third-largest oil importer, has been concerned about elevated oil prices adversely impacting the country’s trade deficit and consequently the current account deficit. Every dollar increase in the price of oil raises the import bill by around 10,700 crore a year. Oil imports rose by over 25% in 2017-18 to $109 billion from a year ago.

“Global oil demand growth in 2019 is expected to be around 1.35 million barrels per day (mbpd). The US itself will ramp up its supply by 1.2 mbpd, averaging more than 12 mbpd. Local geopolitical events may not have any lasting impact on oil prices in the first half of 2019," added Mishra.

Tensions between India and Pakistan are heightened after the February 14 suicide attack by the Pakistan-based Jaish-e-Mohammad terror group that killed 40 CRPF soldiers in Jammu and Kashmir's Pulwama district. Prime Minister Narendra Modi recently said the armed forces had been given a free hand to respond to the Pulwama attack at the time of their choosing.

The cost of the Indian basket of crude, which represents the average of Oman, Dubai and Brent crude, was $66.19 a barrel on 25 February, according to the Petroleum Planning and Analysis Cell. The cost of the Indian basket of crude, which averaged $47.56 and $56.43 per barrel in 2016-17 and 2017-18, registered an average of $57.77 in December. International crude oil prices had reached a record high of $147 per barrel in July 2009.

As part of India’s evolving energy security architecture, the National Democratic Alliance (NDA) government is also working on the second phase of strategic petroleum reserves. Such reserves will help India manage supply risks.

Strategic crude oil reserves, which are typically state-funded and meant to tackle emergency situations, allow a country to tide over short-term supply disruptions. Member nations of the International Energy Agency (IEA) maintain emergency oil reserves equivalent to at least 90 days of net imports.

India has an existing storage capacity of 5.3 million tonnes at Visakhapatnam (1.33 million tonnes), Mangaluru (1.5 million tonnes) and Padur (2.5 million tonnes). The government in June approved construction of an additional 6.5 million tonnes of strategic crude oil reserves. These facilities together will help support 22 days of India’s crude oil requirements.

India’s energy demand is expected to grow at 4.2% over the next 25 years. This has prompted global majors such as Saudi Aramco, the world’s biggest oil producer, and Russia’s Rosneft PJSC, to invest in India, thereby ensuring offtake security.

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