Don’t let political posturing lower our energy security

Through February, India’s petroleum minister Dharmendra Pradhan had been urging the ‘OPEC +’ group of oil producers to do away with production cuts and bring prices down. Not only did they fail to heed his request, the Saudi energy minister, Prince Abdulaziz bin Salman, even suggested that India use the cheap oil it had bought last year and kept in storage. In retaliation, public-sector oil importers were instructed to reduce purchases from Saudi Arabia. Imports from the kingdom were reduced from 910,000 barrels per day (b/d) in December to 445,000 b/d in February. Indian media gloated that India had made up for the shortfall with increased purchases from the US—up from 260,000 b/d to 545,000 b/d over the same period—thus firmly putting the Saudis in their place.

This month, the Organisation of the Petroleum Exporting Countries (plus Russia), better known as OPEC +, decided to extend production cuts into April, with Saudi Arabia adding the unkindest cut by further reducing its output by one million barrels per day (mbd). India is now expected to deepen its cuts in Saudi imports from May onwards.

There has been extraordinary volatility in oil prices over the last year, largely due to the global economic collapse caused by the pandemic that reduced world demand. Prices (Indian basket) reached a low of $19.90 per barrel in April 2020, and, were still below $45 in November. Production cuts by the OPEC+ in February pushed prices above $60; they briefly crossed $70 in early March, before settling at over $65. OPEC’s justification for its actions is that the global oil demand scenario is still fraught with uncertainty: while there are signs of economic recovery and a positive outlook due to vaccinations, these are offset by fresh lockdowns in several European countries and high unemployment figures in the US. This has compelled OPEC to reduce its earlier demand projections by 180,000 bpd for the first quarter of 2021, and by 310,000 bpd for the second quarter. The situation is expected to improve in the third quarter, with increased demand of 400,000 bpd, and of 1 mbd in the fourth quarter.

While we have every right to focus on our difficulties, it is worth recalling that the economies of almost all oil producers are crucially dependent on oil revenues. The Indian minister’s ire is misdirected. Even when world prices were very low, no benefits were passed on to domestic consumers by the government. Between March and June 2020, when oil prices were $20-40 per barrel, the average cost of petrol per litre in India was ₹70. From July to December 2020, when oil prices were $40-50, petrol prices remained above ₹80, and topped ₹90 this March as oil crossed $65.

Consider the arithmetic of petrol pricing in India. At $65 per barrel, the oil price here is about ₹30 per litre; this, however, translates to ₹91.17 at the petrol pump, largely on account of excise duty and value-added tax. Revenues from petrol sales are big contributors to the national exchequer: ₹8,000 crore in 2018-19 and ₹7,400 crore in 2019-20. Excise duty alone provides about 20% of the government’s indirect tax revenues.

A more thoughtful approach to sustain India’s energy security interests would take into account some ground realities, as projected recently by the International Energy Agency. One, fossil fuels will continue to form about 75-80% of the national energy mix till 2040 and beyond. Two, India’s energy needs are expected to increase by 25-35% by 2040, largely because 270 million more people will join the urban population. Three, India will remain import-dependent for its hydrocarbon needs, with imported oil reaching over 90% by 2040. Four, the Gulf will remain the main source of Indian imports, given the region’s abundant reserves, geographical proximity and high availability of medium-to-heavy crude that is best suited for Indian refineries. Supplies from elsewhere will largely be supplementary and based on spot purchases.

Finally, while Pradhan expressed the need for “reasonable and responsible” oil prices, this has not been achieved in the last 50 years. Despite multiple producers, oil is a single global market, with prices being influenced by developments that affect production or transport. These include: war, civil conflict, sanctions or natural disasters; technological innovations that enhance production, increase efficiency or improve transport; and policies that affect demand, such as commitments against climate change.

On the face of it, the divide between the interests of producers and consumers seems fundamental. This is not true. On the logic that producers need assured markets and consumers need assured supplies at affordable prices, Pradhan’s predecessor had, 15 years ago, convened two ‘round tables’ in Delhi for a producer-consumer dialogue.

These had brought together Asia’s principal consumers—India, China, Japan and South Korea—to interact with producers from West, Central and North Asia (Russia). These discussions produced two consensual documents that envisaged cooperation instead of confrontation. They provided for participation in each other’s energy projects with investment and technology exchanges, cooperation in third countries, backing for transnational pipelines, and even the pursuit of an Asian gas grid.

Such initiatives offer us a more useful approach to serve our energy-security interests than displays of irascibility vis-a-vis one of the world’s largest oil producers that’s also India’s closest friend in West Asia.

Talmiz Ahmad is a former Indian ambassador to Saudi Arabia