By Bhamy V Shenoy
It is ironical that even as prime minister Narendra Modi has been strengthening private relations with crown prince of Saudi Arabia, Mohammed bin Salman (MBS), India’s oil minister, Dharmendra Pradhan is sabre-rattling by making use of India’s oil acquire as a “weapon”.
Either India’s oil ministry does not want to understand from the planet oil history, or genuinely believes that India can dictate terms to force the Organization of the Petroleum Exporting Countries (OPEC) to adapt oil production policy to meet its requires of reduce oil cost by rising oil production. This is a fantastic instance of the tail attempting to wag the dog.
Though OPEC was formed as early as 1960 to manage oil pricing, it was only immediately after the 1st oil shock of 1973 that it was in a position to exercising its energy. When the oil cost went up by 400% to precipitate financial crisis, OECD formed the International Energy Agency (IEA) as a countervailing force and create strategic oil reserves.
None of the potent OECD nations threatened OPEC individually. But, by means of IEA, they sent a potent message. IEA nations managed to cut down oil demand, and OPEC learnt the lesson. Though oil demand is inelastic in the quick term, in the medium and lengthy term, this is not the case.
Late Sheik Yamani, who had served as the Saudi oil minister, had famously mentioned that the Stone Age did not come to an finish for the reason that our planet ran out of stones. OPEC+ is totally conscious of the want to stop the oil cost from going beyond a tipping point. But, no one knows what that is.
Beginning of April, OPEC+ decided to enhance their oil production by 2 million barrels per day (mmbd) progressively more than 3 months beginning from May. Soon immediately after that announcement, oil rates declined, even though not precipitately. I wonder why our oil minister did not claim that India played some part, to get political capital.
In reality, two components may well have influenced the OPEC+ selection. First, the internal dynamics amongst OPEC+ members to safe larger industry-share. Mostly, Russia and the UAE have been placing stress on the OPEC+ to loosen up quota for some time.
Second is the possibility of oil demand going up by more than 2 mmbd in the second half the year. With the spread of the Covid-19 vaccination programme in distinct components of the planet, there is significantly optimism on the portion of oil pundits more than oil rates reaching $80 per barrel in the third quarter.
Even ahead of the current oil cost strengthening, oil minister Pradhan had been commenting that India could use its considerable oil purchases as a “weapon”—since at least 2015. Finally, this year, he began to use this weapon against Saudi Arabia. Recently, he has instructed the public sector oil firms to cut down imports from Saudis.
He could have been more diplomatic and played his cards without having revealing them due to the fact his possibilities of winning had been not higher. It appears as even though he wanted to get political capital by displaying that he is ready to dictate to the Saudis, the de facto leader of the OPEC and also of Islamic nations.
With India’s oil import dependency at 85%, we are not in a sturdy position to throw our weight about. It is correct that, at the present price of import—of about 5 million barrels per day—India is the third-biggest oil importer immediately after China and the US. In a couple of more years, India may possibly grow to be the second-biggest.
Currently, it is a buyer’s industry with more than 6-7 million barrels per day surplus crude oil production capacity. As the planet is going by means of a significantly-necessary power transition to cut down dependence on fossil fuels, the historical energy of OPEC will diminish. This may well have offered a false sense of energy to the oil minister to urge Saudis not to cut down oil production and permit industry forces to set the rates.
One can even get in touch with such an act “childish.” For most nations in the OPEC, oil cost can make or break the economy of their nations and even destabilise their governments. For India, larger oil rates are absolutely a major difficulty, but manageable with some difficulty. Given this reality, India must not have produced such a threat publicly.
In 2019, in the course of his stop by to India, MBS had announced Saudi Arabia’s interest in investig $one hundred billion or more in India. Saudi Aramco is thinking of acquiring 20% stake in Reliance Industries’ oil and chemical enterprise. It is a joint venture companion in a proposed 1.2 mmbd refinery along with public sector oil firms on the western coast of India.
The minister, without having creating significantly noise in the media, could have quietly asked Indian oil firms to start out rising their spot acquire from any nation which delivers superior terms. Already, India is importing from many nations and its dependence on the Saudis is under 10%.
Also, India could have attempted to kind a group of significant oil importers to place stress on OPEC+ not to permit rates to go higher or to give discounts to establishing nations like India in a diplomatic way.
Often, it is the speculators of future trading platforms who contribute to crude oil cost volatility. Such a cost volatility aids neither the oil exporters nor the oil importers. Both the oil importing and exporting nations must get with each other to replace the present hugely damaging and unproductive futures industry to “discover” oil rates.
Economists who belong to the fundamentalist college are unlikely to help such a stand. Their argument is that futures industry will ‘discover’ cost most effectively.
Two current examples show how incorrect they had been. Last year, the crude oil seller was prepared to spend as significantly as $40 per barrel to the purchaser for the reason that of the irrational behaviour of the futures industry. When crude oil cost enhanced to a historic higher of $147/barrel in 2008, what goal did it serve? It is higher time that we get rid of the futures industry. It is right here that India must take a lead, rather than fighting with Saudi Arabia.
Since there is as well significantly at stake for each the nations, the Saudis have currently taken a 1st step in not cutting allocation of crude oil for April to India. Let us hope that the Indian oil ministry will reciprocate the gesture and work towards a superior partnership with the Saudis.
The author is Former manager, Conoco, and former board member of the national oil organization of Georgia Views are private