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World Oil Scenario And India

Updated: February 14, 2015 4:20 am

With the crude oil price in the international market touching a record low of around $ 60 a barrel, it is now time for India to gird up its loins and ensure energy security for herself in, at least, the coming decade. A long term planning is necessary because contrary to the popular view that fall in crude prices has come as a windfall for rising economies like China and India; a host of negative consequences are also likely. Therefore, New Delhi must continue its focus on renewable energy sources like solar power and also expedite exploitation of shale gas.

There is no doubt that the fall in oil prices will help India’s economic planners a great deal as it would cut down the country’s fiscal deficit to a great extent. In June, last cost of a barrel of crude oil in the international market was $115 and it is axiomatic that this price nosedive within a span of eight months will greatly relieve pressures on the government’s treasury as nearly 80 per cent of India’s oil demand is met through imports. In 2013-2014 oil import bill stood at a staggering $165 billion or 36 per cent of the country’s total import bill.

According to analysts, price of petroleum may remain the same till the end of 2015. In that case it may result in a topsy turvy in the world political situation. It is undeniable that discovery and exploitation of huge amounts of shale gas in the United States has led to a different kind of energy production there reducing, in the process, America’s dependence on Middle-Eastern and West Asian oil.

But shale gas is not the only reason behind the price fall. America has willingly created a glut in the oil market by constant increase in production, perhaps with the intention of crippling the oil and gas export based Russian economy in the wake of the crisis over Ukraine. Just in the second half of last year the US increased its production from 8.5 million barrel per day (BPD) in July to 9 million BPD in December. In 2012, 2013 and 2014, the US, in fact, continuously increased its production by 1 million BPD per year. According to some US government branches, Washington is all set to effect a substantial increase in oil production in 2015.

14-02-2015There are reasons behind the prediction that low prices may continue throughout 2015. Apart from increased productions, North America has witnessed structural decline in oil demand since mid 2000s caused, to a large extent, by use of automobiles which run on electricity. Secondly, entire Europe has now been passing through a severe economic slowdown with France recording almost zero growth. Thirdly China, a major economic force in today’s world, is experiencing decline in growth. Beijing’s housing and related industries has been consistently showing declines. Last year growth of Chinese demands for oil was only 4 lakh BPD. Obviously the oil majors are at a loss to handle the situation. The Organization of Petroleum Exporting Countries (OPEC), though now contributing only 40 per cent of the world’s oil production, is still a factor to reckon with. But it is plagued by disunity among its members and hence cannot downsize the quantum of production as some important constituents of the OPEC like Libiya, Algeria, Iran, Iraq, Nigeria and Venezuela are solely dependent on oil revenues and need high production and high price. In fact OPEC has now reached its highest level of production in two years. Among the OPEC countries only Saudi Arabia, the United Arab Emirates and Kuwait are in a position to cut down production.

How should India respond to such a scenario? In a word, India should follow China in this respect. Taking advantage of the low price scenario Beijing is now busy increasing the amount of its oil reserve. Secondly, it would extend a $20 billion loan to Venezuela to jack up oil exploration and exploitation infrastructure. In return Chinese companies may be awarded with stakes in some valuable oil basins.

Fall in oil prices is certain to appear as boon for developing economies. But the issue has its flip sides too. More than $2 trillion of bank funding has now got stuck up in oil exploration and production business. If such low prices continue then many such projects may face viability crisis. Moreover many companies dealing in polymers, chemicals and other derivatives like synthetic yarn may be faced with the problem of high cost inventories. They might have purchased their basic material i.e. oil at a high cost but are now faced with financial losses due to low price.

By Amitava Mukherjee

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