Sushma Ramachandran

The Indian economy looks set to grow faster than most others in the world today but it faces a threat in the form of volatile global oil prices. Though it is broadly expected to grow at around 6.5 to 7 percent in the current fiscal – 2022-23 – rising oil prices can act as a dampener. Fortunately, there has been considerable softening in the international market over the last few months which has brought some relief to a country that imports 85 percent of its crude oil requirements.

Fuel prices had earlier become a major factor in pushing up inflation over the past six months as domestic rates had to be aligned to some extent with global levels. Even though the full extent of imported oil costs has not been passed on to consumers, it has still had a big impact both on the industry as well as domestic consumers.

In the present international climate, however, there is little chance of predicting the future outlook for global oil prices whether in the short or medium term, with any measure of success. Prices of the benchmark Brent crude are hovering at around 92 to 95 dollars per barrel right now. This is much lower than the average of about 110 dollars per barrel ever since February this year when the Ukraine conflict erupted.

At the time, prices had shot up to as much as 130 dollars per barrel for a brief period. There was moderation subsequently but even those levels were too high for this country. The budgetary projections for the current fiscal, it must be recalled, were in the range of 70 to 75 dollars per barrel. This was before the invasion of Ukraine altered the entire geopolitical scenario.

Over the past few months, however, the outlook has been more sanguine from the point of view of an emerging economy like India. Prices suddenly began to fall below the 100 dollars per barrel mark in August, dipping to 90 dollars in September, making them far more affordable. The changes in the market were due to several factors but the most significant was the situation in China which led to a fall in global oil demand and pointed to a greater decline in the near term.

The stringent zero-Covid policy in that country meant there were curbs on movement in many key industrial regions and thereby a slowdown in the entire gamut of economic activities. This, in turn, meant that there would be a steep fall in oil consumption in a country that has been the leading crude importer in the world.

Another major factor contributing to the decline in oil prices- has been the aggressive monetary policy tightening of central banks in response to rising inflation. The consequent fears of a global recession created further uncertainty in the oil markets.

The outlook altered yet again in early October when the oil cartel, OPEC plus decided to give a fillip to oil prices by cutting output. It announced that the cartel would reduce production by 2 million barrels per day from November 1 onwards. This spooked markets which then surged again over the past month. Even so, prices have remained at a range of about 92 to 95 dollars per barrel which continues to be high for countries like India. Fortunately, revenue inflows have been buoyant this year so it looks as if the oil import bill will be manageable at this level for the current fiscal.

Against this backdrop, it is clear that international oil markets have been marked by extreme volatility throughout the year. While investment agencies like Goldman Sachs are making predictions that oil prices would average 110 dollars in 2023, there is no certainty on this score because much will depend on geopolitical developments. One major factor that has had a huge impact on oil markets is the war in Ukraine. Till that continues, there will continue to be a standoff between western nations and Russia over the issue of energy supplies.

The present energy crisis engulfing Europe is due to cuts in natural gas being supplied from Russia through pipelines. The reasons given are technical maintenance issues and recently there have been bomb blasts along with the route of the pipeline. The gas shortages have led to soaring fuel costs for  European consumers and pushed inflation to record levels.

As far as India is concerned, it has taken a clear stance based on national self-interest. It has purchased Russian oil which has been made available at discounted prices in a bid to reduce the import bill. Even so, it continues to source much of its oil purchases from traditional suppliers like Iraq, Saudi Arabia, and the UAE. While western countries have been opposed to India’s purchase of Russian oil, it has been pointed out by Petroleum Minister Hardeep Puri in interviews that European countries buy much larger quantities of oil from that country in a single day. The only difference is that oil is supplied via pipelines to Europe while India’s needs are met by oil tankers via sea routes.

In such an uncertain scenario, it makes sense for India to adopt a policy of diversifying sources of supply. It has already been recognized that excessive dependence on oil imports from countries where there is potential for political disruption needs to be avoided at all costs. Media reports indicate that it is on these grounds that it is seeking to reduce supplies from Iraq which is one of the biggest oil suppliers to this country.

Other non-traditional sources being considered include Canada, Brazil, Columbia, Guyana, and Gabon. The volume of purchases from these countries is small right now – about two to three percent of total imports -  but it is felt these can be increased significantly to help cushion against adverse geopolitical developments.

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In the existing geopolitical scenario, India must accord the highest priority to energy security. Given the continuing volatility in global oil markets, policymakers need to ensure that sources of supply are sustainable and not disrupted at any stage. To achieve this goal, the current strategy of keeping national interests in mind without succumbing to any western pressure needs to be continued in the long run.