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Sushma Ramachandran
Senior Financial Journalist
ENERGY has always been a strategic commodity and at the heart of many conflicts over the years. No wonder then that the war in Ukraine turned energy into a political weapon used by both western countries and Russia to achieve the goal of creating economic hardship in enemy camps. The first salvo was fired by the West by imposing economic sanctions, including a ban on the purchase of Russian oil. With Russia having found alternative buyers like India and China, efforts are now being made to cap the prices of crude oil exported from there.
Just as the G-7 countries themselves left out gas supplies from the list of sanctions in their own interests, economic self-interest should guide India’s policy.
The response to the initial salvo has turned out to be an unexpected one for the West. Russia has cut back on gas supplies being sent to Europe through the Nordstream 1 pipeline. This has led to a crisis for countries like Germany that rely on Russian gas for as much as 40 per cent of their total energy needs. The pretext given for stopping gas supplies temporarily is technical repair issues, but undoubtedly it is a response to western efforts to create economic distress in Russia.
Such a reaction should have been anticipated by the West when it launched sanctions since several European countries are heavily dependent on gas supplies from their eastern neighbour. A long-term perspective seems to have been missing while formulating the sanctions on Russia. Given the fact that the invasion of Ukraine at the end of February this year had led to a complete disruption of global oil and gas markets, there should have been a greater awareness of the ramifications of trying to curtail oil sales.
The immediate impact of the conflict was an unprecedented spurt in crude prices of up to $139 per barrel, though these subsided soon to range in the region of $110 to $120 per barrel for several months. Gas prices also shot up. The spiralling oil and gas rates became a deadly combination, spurring inflation globally.
The impact of such high fossil fuel prices naturally reverberated in emerging economies like India, which ended up grappling with inflationary pressures and interest rate hikes. The good news is that world oil prices are softening to more affordable levels. The benchmark Brent crude has fallen to about $93.88 per barrel while the American West Texas Intermediate crude is ruling at $87.78 per barrel. The broad trend is that prices are now hovering in the range of $88 to $98 per barrel.
This makes life much easier for India, which saw its crude oil import bill spurt to $119 billion in 2021-22. In the previous year, the bill had been considerably lower at $63.5 billion owing to the impact of the Covid pandemic and the crash in oil prices during April and May 2021. But all budgetary calculations for the current fiscal went awry owing to the Ukraine conflict. The assessment had been that world prices would hover in the range of $75 to $80 per barrel during the year, but these ended up ruling in the range of $110 to $120 per barrel from April this year.
The lower international prices currently are sparking demands that domestic retail rates should be reduced immediately. But it has to be remembered that oil marketing companies did not jack up rates in line with global hardening trends over the first five months of the current fiscal. These companies will have to recoup some of their heavy losses over this period before looking to bring down retail prices.
As for the reasons behind the latest softening of prices in world oil markets, a major factor has been the prospect of oil demand contracting in China for the first time in two decades. This is due to the zero Covid policy curbing movement and reducing fuel consumption of the world’s biggest energy buyer. Crude oil imports for the January-August period by China have already dipped by 4.7 per cent.
Meanwhile, the G-7 countries have launched initiatives to lure New Delhi to enforce a price cap on Russian oil. That country is countering by offering even bigger discounts than ever before on oil supplies. It looks unlikely that India would succumb to persuasion by the G-7 on this score. The hard reality is that oil is a critical strategic issue where the country’s self-interest has to be given priority. Just as the G-7 countries themselves left out gas supplies from the list of sanctions in their own best interests, India will have to take a view based on its own economic imperatives.
These dictate the urgency of containing the oil import bill and reducing pressure on the exchequer so that the fiscal deficit can be kept at manageable levels. Inflationary pressures on the economy cannot be wished away. As for the current dip in world prices, this will have to be sustained for several months to bring down the oil import bill significantly. In the meantime, India is bound to accept offers of oil at discounted rates, whether from Russia or Iraq, which are both offering oil at prices lower than market rates right now. The share of Russian crude, which was merely 1 per cent of the total import volumes in February, reached 18 per cent last month, as against 20.8 per cent for Saudi Arabia and 20.4 per cent for Iraq.
The western allies, therefore, including the US, the UK and the European Union in the G-7, need to make a more compelling case for India to involve itself in the scheme to cap prices on Russian oil. They must recognise that the domestic economy is in a fragile state of recovery after two years of the pandemic. India thus has no option but to accord the highest priority to the interests of its people and their economic wellbeing rather than getting involved in an energy war that could hurt the country’s prospects for higher growth.
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