Altaf Azam
The writer is a post-grad student at Centre for West Asian Studies, Jamia Millia Islamia, New Delhi
I. Introduction
When cities around the world are experiencing an eerie desolation induced by state-imposed lockdowns, there is a frantic slump prevailing in the global oil markets. On Monday, the 20th of April, 2020, an empty barrel of crude oil was worth much more than a barrel full, as Oil traded at a historic low of -37 $ a barrel at the WTI. However, from India’s perspective, the majority of its crude basket represents oil from Oman/ Dubai axis which is based on Brent crude benchmark prices, which too sank to a two-decade low of just under 16 $ a barrel, but well above the WTI[i]. A historic low in oil prices is nothing short of a celebration for the 3rd largest consumer of Oil with over 80% reliance on oil imports for its petroleum needs[ii]. However, the ground reality is quite the opposite.
Contrary to such low global oil prices, there will be
very marginal impact on the Indian economy and fuel prices in India. With all
flights grounded, coupled with a nationwide lockdown on passenger mobility,
India has witnessed a 40% dip in its petroleum needs. A significant consequence
of such circumstances is also indicative of a bleak predicament for any
prospective energy trade between India & the US for the foreseeable future.
II. US-India Trade Relations
Washington led by President Trump has been constantly
lobbying to secure trade parity with its trade deficit counterparts. Energy
cooperation emerged as a key pillar of Indo-US strategic partnership. This was
evident from the fact that the energy trade between the two nations touched
$7.7 billion last year — this intensity of energy exchange being a story of the
last two years alone. Pressurized by the US to forgo oil Imports from Iran,
Delhi thus resorted to additional supply from the Arab producers & a
strategy to diversify its energy mix, securing supplies from African states
& the US. In 2019, India increased its US oil imports to about 1,84,000
barrels per day, four times more than in 2018, and up from zero imports just
four years ago, making it the sixth-largest supplier of crude oil, and the
fifth-largest supplier of LNG to India. Although oil imports from the US have
quadrupled over recent years, the quantity still remains minuscule, forming
just about 3 % of India’s import mix. Energy sourcing from the US is not the
cheapest option for India but is crucial to trim the trade imbalance between
the two countries & to garner better relations with the incumbent
administration presiding in the White House. America’s trade deficit with India
declined significantly from more than $22 billion in 2016-17 to around $17
billion in 2018-19 as India initiated buying oil and gas from the US in 2017[iii].
This is amicable to either side as India under Prime Minster Modi seeks to
garner good relations with the US & the US seeks to narrow its trade
imbalances. In fact, talks on energy imports were a crucial aspect of
discussions on the side-lines of Howdy-Modi campaign & President Trumps
visit to India in February 2020. However, the benefits of such trade
cooperation seem marred by uncertainty following the prevailing
pandemic-induced global slump in oil demand & prices.
III. Impact on the US Oil Industry
The Shale Oil revolution which propelled the US to the
largest producer of oil in recent years & was crucial in transforming it
from a net importer to a net exporter is witnessing its darkest days. The
industry, whose growth allowed President Trump to boast of cutting US
dependence on Middle Eastern oil and freed his hand to sanction energy
exporters from Iran to Russia, is now on its knees. Producers across the US oil
patch, with higher production costs than international rivals, are in acute
distress, pleading for Washington to ease the pain by cutting foreign oil
imports or providing the industry with Covid-induced bailouts to stave off
bankruptcy and job losses. Unlike the government-owned oil companies across the
globe, US shale mostly operates as independent private ventures without any
government backing which makes it acutely vulnerable in such circumstances. The
industry has been hit by a perfect storm of historically depressed energy
demand due to coronavirus containment efforts & a shocking oil glut
prompted by the falling out of Saudi Arabia with its OPEC+ counterpart- Russia.
For American shale oil producers to stay in business, average oil prices at the
WTI needs to hover at $40 to $45 per barrel at the very minimum due to the
relatively expensive extraction costs. In contrast, Saudi oil is the cheapest
to produce in the world at an average of $8.98 per barrel and Russian
production costs average at $19.21 per barrel[iv].
Just covering production & operational costs in such a depressed global
economic environment will leave American shale producers lacking the necessary
funds for shareholder dividends and basic corporate costs.
Already saddled with extensive debt, trading at
distressed levels, and effectively shut out of credit lines by banks, the
industry is going to suffer historic shutdowns. The effects are already visible
in the American shale oil industry. About 100 oil and gas companies could be
filing for bankruptcy over the next year, a figure that could balloon if prices
for WTI stay below $40 per barrel. While shale oil had propelled the US to
become the world's largest petroleum producer, averaging nearly 17.9 million
barrels per day earlier this year, US total petroleum output could
significantly fall by 2 million to 3 million barrels per day by the end of 2020[v].
This would reinstate the US back to a net Importer of oil & substantially
cut short Washington’s ambitions of greater oil exports to India.
IV. Implications of the US-brokered Oil Deal & the discord between Saudi Arabia – Russia
Oil prices had taken a fall after the Saudi-induced
oil glut in the world market following the fallout with its OPEC+ counterpart-
Russia, well before the pandemic had brought the world to a standstill. Mix the
glut of oil in the market along with the collapse in global economic activity
& we have got a lethal concoction for a drastic decline in oil prices.
The Trump brokered oil deal which concluded a collective commitment to
cut 9.7 million in oil production starting 1st May[vi]
is believed to be too little, too late with the collapse in global demand
jeopardizing a further fall in oil prices over the vast mismatch in global oil
demand & supply.
Since Saudi Arabia's failed attempt in 2014 to
sabotage the US shale oil industry by flooding the global markets with surplus
supply, the Saudis and Russians have been giving unconventional American oil a
free ride. Clearly, this has come to an end now. This drop in US output is
likely to continue for some time.
As America's goal of energy independence slips away,
the US government will need to appease, collaborate and seek favor with those
countries that are feeding its massive, oil-hungry economy as it has in the
past. Foremost among these is Saudi Arabia, which has evinced its newfound
ability to control the future trajectory of oil markets by showing how truly
vulnerable the American oil industry is to the kingdom's energy policy. In this
dynamic environment, the US will be forced to recalibrate its foreign and
economic policies to face the new reality of energy interdependence. It further
reinforces the fact that Saudi Arabia is the ultimate heavyweight in the oil
market, & that India still remains heavily reliant on the Arab producers
for securing its energy needs while prospects for Indo-US energy trade remain
stalled for the time being.
V. Impact on Indian Government
Retail prices of petrol, and diesel in India, to a
large extent, constitute of taxes. The government has steadily increasing these
taxes over the years to generate additional revenue for state coffers. In fact,
the government last month increased duties on petrol and diesel by Rs.3 per liter,
the steepest hike since 2012[vii],
after crude oil prices went crashing down. Despite this, with the country on
lockdown until 3rd May, the govt. has not been able to realize much benefit as
petroleum sales are dismal.
VI. Impact on the Indian Oil Industry
Most of the oil marketing companies (OMCs) like BPCL,
HPCL, and Indian Oil Corporation (IOC) do not engage much in risky futures
hedging & go for safe six months to one-year contracts, whereas the global
norm is about three months. Following a sharp decline in demand, oil companies
have reduced production capacity by 50% & Estimates indicate that almost
the entire 85 million barrel storage capacity with the state-run companies is
full. This clearly indicates that the oil industry is not in a position to
capitalize on the dramatic sink in global oil prices.
Even if we think of Strategic Storage to leverage
falling oil prices, our reserve capacities are not more than 5.3 million tones
(MT) for three months, which is a small portion of our overall 200 MT plus
purchases[viii].
The size of India's Strategic Oil Reserves which are believed to be half filled
to its capacity already, are not big enough to absorb the current shock in the
oil market and the current crisis has become a missed opportunity for the
country that could have otherwise stirred cheap oil in large quantities in
reserves. With the situation developing on the demand front, a lot of crude
from state-run oil companies will be directed to meet this demand rather than
reaping the benefits of cheap oil from across the globe.
REFERENCES
[i] https://www.businesstoday.in/latest/economy-politics/story/why-petrol-prices-wont-fall-even-though-us-crude-oil-costs-0-256097-2020-04-21
[ii] https://bangaloremirror.indiatimes.com/bangalore/others/how-india-should-exploit-the-crash-in-crude-prices/articleshow/75334432.cms
[iii] https://economictimes.indiatimes.com/industry/energy/oil-gas/after-trumps-india-visit-oil-and-gas-imports-from-united-states-set-to-increase/articleshow/74311585.cms?from=mdr
[iv] https://edition.cnn.com/2020/04/23/perspectives/american-oil-boom-end/index.html
[v] https://www.cnbc.com/2020/04/22/us-oil-production-plunges-as-the-industry-retrenches-and-more-cuts-are-expected-after-a-price-crash.html
[vi] https://edition.cnn.com/2020/04/12/energy/opec-deal-production-cut/index.html
[vii] https://www.businesstoday.in/latest/petrol-diesel-rate-price-today/story/govt-hikes-fuel-excise-duty-by-rs-3-per-litre-steepest-in-8-years-to-exploit-crude-price-crash-252085-2020-03-14
[viii] https://www.businesstoday.in/latest/petrol-diesel-rate-price-today/story/govt-hikes-fuel-excise-duty-by-rs-3-per-litre-steepest-in-8-years-to-exploit-crude-price-crash-252085-2020-03-14
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