Opinion
Jaishankar is right about India's choice of Russian oil cooling global inflation
Summary
- If India had continued its imports of oil from Opec, it would have competed with Europe, thus pushing up prices.
External affairs minister S Jaishankar probably came across as patronizing, at the least, when he recently told a London audience that by buying Russian oil after the West had announced sanctions, India actually helped contain global inflation. We are waiting for a thank you note," he added for good measure.
Whether Jaishankar sounded a trifle full of Jaishankar or not, he was spot on. India stepping in to buy the Russian oil the West had decided to boycott, in part, if not in full, helped keep global inflation down. This is a simple fact.
Russia’s invasion of Ukraine began on 24 February, 2022. The European and American boycott of Russian oil followed. Energy-strapped EU banned only seaborne oil from Russia, displaying remarkable forbearance and self-preservation by continuing to let in Russian oil via the Druzhba pipeline. However, since December, the EU has been cutting down on piped oil imports also. Similar has been the story of Russian gas as well, although with more dramatic developments such as the sabotage of an underwater pipeline in the Baltic Sea.
The G7 has also imposed a shipping restriction on Russian oil, decreeing that Western tankers and insurance companies would support Russian oil exports only if the export price was at or below $60 a barrel. The US stopped importing Russian oil altogether.
According to Brugel, a Brussels-based European think tank, the EU used to account for nearly two-fifths of Russian oil exports, even as Russia accounted for 13% of global oil exports in 2021, the year before the war. China accounted for another 30% of Russian oil exports. Seaborne oil exports from Russia to the EU amounted for 29% of Russian oil exports, or 75.6 million tonne, which is what the EU has majorly cut back on. A tonne of oil is 7.33 barrels of oil. India has imported 1.76 million barrels a day on average from Russia over April-September this year, according to a Reuters report. This amounts to an annual rate of 87.6 million tonne, half of that being additional to what India imported in 2021.
Clearly, India has been instrumental, via its additional imports from Russia, in neutralizing the reduction in availability of crude that a total ban on Russian seaborne crude by the EU would have created. When Europe stopped buying seaborne oil from Russia, it turned to other sources of oil, chiefly Opec and the US. Now, if India, which has traditionally sourced its oil mostly from OPEC countries, had continued with its imports of oil from these countries, it would have competed with Europe for the same oil, pushing up prices. India gracefully switched a large portion of its demand to Russia, making the oil it used to source from OPEC available for Europe to buy.
Of course, it was not Europe alone that benefitted from an avoided price spike in oil. All oil-importing countries gained from the moderating effect of India switching its demand to Russia from traditional import sources.
Gas prices saw much sharper increases when Europe turned to non-Russian sources for import. The way the gas market works is like this: almost 40% of the market comprises short-term and spot contracts. Only long-term contracts bind the supplier to make available the contracted gas. But even for long-term contracts, the price tends to be linked to an average of other energy prices, so that when crude prices move up, gas prices, too, rise in tandem. So, when Europe sought to substitute Russian gas with gas from elsewhere, traditional importers of this gas saw their prices shoot up, much more than in the case of oil. Only a relatively mild winter in 2022 shielded the world from even higher gas prices than the ones it witnessed.
India is the world’s third-largest importer of oil. By refusing to join the sanctimonious and largely hypocritical western boycott of Russian oil (the West is more than happy to snap up the refined products that India supplies, derived from Russian crude), India kept the total global supply of oil, including that from Russia, from falling steeply. This helped contain energy price inflation and prevented an even greater dent to global growth than the one that, in any case, has been delivered by the war, lagging supply disruptions from the pandemic, resultant inflation, and the steep increase in policy interest rates across the world.
Instead of criticizing India for not joining the economic sanctions declared by the West on Russia, the world should, indeed, be saying thank you.
