India’s Oil Predicament [Editorial Simplified]

India’s Oil Predicament [Editorial Simplified]

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GS (M) Paper-2: “Effect of policies and politics of developed and developing countries on India’s interests, Indian diaspora.”

GS (M) Paper-3: “Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.”

Introduction:

• India is the third largest consumer of crude oil in the world.
• Its demand for oil is growing fast at a time when demand growth is slowing down in older industrialised economies.

Reasons for the falling oil prices:

• A major reason for the earlier fall in prices was significant changes in the global oil market.
• It is heavily influenced by the Organization of the Petroleum Exporting Countries (OPEC) members, notably Saudi Arabia, the world’s largest oil producer.
• The lower prices took a toll on OPEC members themselves, some of whose budgets depended heavily on oil revenues.
• The resultant OPEC agreement of late-2016 imposed production limits on its members to address global excess supply and to shore up prices.
• Since then, prices have steadily risen.

Analysing India’s situation:

• The global oil industry sees India as the most important export destination for the next two decades.
• India already imports over 80% of its crude oil requirement.
• With domestic production declining, it could become even more vulnerable to the vagaries of international crude oil markets in the future.
• Although the last three years since mid-2014 have been favourable for India by way of lower import prices, this is beginning to change for the worse.
• India now is trying to diversify its source countries due to its dependence on imports.

Indian Government taking the advantage of the falling oil prices:

• When the global crude oil prices fell from $105 per barrel in 2013–14 to $46 per barrel in 2015–16, the new government, took advantage of the lower prices and raised duties to earn higher revenues instead of passing on the benefits to consumers.
• This meant that retail consumers paid as much for petrol and diesel as they did when the import prices were over $100 per barrel.

Shale oil:

• High oil prices between 2011 and 2014 led to increased investment and output of United States (US) shale oil (a non-conventional fossil fuel).
• Shale oil extraction involves injecting liquid at high pressure into underground rock formations to open fissures and force out oil or gas.
• In the past, shale oil extraction was considered an expensive production process that would be unviable below a certain price level.
• Despite prices falling dramatically in mid-2014, OPEC did not cut production to halt the fall in prices, as it hoped US shale oil production to be unprofitable.
• Instead, although low prices affected it, shale oil extraction proved resilient through improved production techniques and with producers holding on till prices rose.
• The US has emerged as the world’s largest fast-growing oil producer due to increased shale oil production which makes oil imports from US more important.

Opportunities for India:

• Though India continues to import a substantial portion of its crude oil from OPEC members there was 42% rise in the value of oil imports compared to last year, while Non-OPEC sources accounted for about 64.8% rise in value.
• A greater diversity of sources for crude oil will put India in a better position to negotiate with large OPEC member suppliers.

Scope of alternate sources of energy:

• The global oil markets have been concerned about whether better efficiency and alternative sources of energy would permanently depress global oil requirements.
• The shift away from oil is slower than expected in developing countries, especially in sectors like road transport.
• The move to alternative, less oil-dependent, transport systems is an important aim that India has adopted partially.
• A co-benefit of increased investment in non-polluting public transport or limits on personal transportation, would help reducing the pollution load in Indian cities, that are already some of the most polluted in the world.

Conclusion:

• India is on a slippery slope unless it begins substituting oil.
• India’s demand for oil and dependence on imports is growing, which makes important for India to have a strategy to drastically reduce fossil fuel dependence.
• This makes economic as well environmental sense. For the economic choices made today, will determine the quality of life of not only for future generations, but also our own.