As volatility grips oil markets, time for India to focus on energy security

International oil markets have become increasingly volatile over the past year. Ever since the Ukraine war began, prices have risen and fallen with dizzying rapidity. It is becoming a risky game to predict the course of global oil prices over both the short and medium term. The net result is that planning ahead for eventualities becomes difficult especially for an emerging economy like India. When the Finance Ministry begins the process of consultations in December to prepare the annual budget, future projections will be difficult in the absence of a firm assessment of world oil prices in 2023.

It must be recalled that for the current fiscal, it had been estimated that oil prices would be in the range of 70 to 75 dollars per barrel. These projections had gone awry after the Ukraine war began in the end of February. Even now it looks as if a guesstimate will have to be relied on for the time being.

Such data is critical as the current spell of volatility in oil markets could become a threat to the overall growth of the economy. India is right now set to grow faster than most other countries at 6.5 to 7 per cent but this could act as a dampener. Fortunately, there has been considerable softening in international markets over the last few months. This has brought relief to a country that imports 85 per cent of its crude oil requirements.

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

Currently prices of the benchmark Brent crude are hovering at around 92 to 95 dollars per barrel. This is much lower than the average of about 110 dollars per barrel ever since February 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 then prices were over the 100 dollar per barrel mark.

Over the past few months, however, the outlook has been more sanguine from this country's point of view. Prices suddenly began to fall below 100 dollars per barrel in August, dipping to 90 dollars in September, making them far more affordable. The changes in the market were due to several factors. The most significant was the situation in China which led to a fall in global oil demand. The stringent zero-Covid policy in that country resulted in an economic slowdown. This, in turn, meant oil consumption will fall steeply 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 cartel members 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 in the present range of about 92 to 95 dollars per barrel continue 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.

In this backdrop, it is clear that volatility has been the order of the day in international oil markets this 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 on energy issues.

The present energy crisis engulfing Europe is due to curbs in natural gas supplied from Russia through pipelines. The reasons given are technical maintenance issues and recently there have been bomb blasts along with the pipeline route. 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 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.

The latest news is that Russia has become the country's biggest supplier of oil for October accounting for 22 per cent of total imports. While western countries may continue to oppose such purchases, it is clear that energy security has to be accorded the highest priority in taking decisions on sourcing oil supplies. The western opposition would also appear far more credible if they had stopped buying Russian oil and gas for their own requirements. Till such time, India too must give primacy to its own energy needs as has been done by most western nations.