When oil won’t matter to India

Remember a monsoon, 30 years ago, when an Arab national staying at the Oberoi hotel in south Mumbai made the headlines for smashing his room window with a chair , so he could feel the rain on himself? For him, it was an act of emotion—he had never experienced rain before. He got away with what others would consider vandalism, because India was totally dependent on West Asian oil for energy, and the Arabs had to be appeased.

Now, three decades later, the situation may be reversing. India is a valued consumer of Arab oil, and it may in turn need to be appeased.

Last week, petroleum prices touched a new five-year low of $72.5 per barrel after the Organization of Petroleum Exporting Countries (OPEC) decided against reducing production.[1] The 35% price drop is a huge relief for India, since petroleum products are a third of the national import bill, and cost the country $165 billion dollars annually.[2]

The price fall has multiple benefits: a narrower current account and fiscal deficit due to cheaper oil imports, and reduced prices at the pump for consumers who will now pay less for food grains, vegetables, cement, and steel.

But will this price level hold? Will 2015 be the year when oil prices cease to matter for India? Judging by history, it can be.

Before oil prices began to rise in 2003, causing India—and the world—financial stress, a 20-year stable run at $20 per barrel had fuelled global growth. But a generation of low and stable prices also resulted in a slacking off of new oil exploration and production efforts. The returns did not justify the expensive exploration investments. So OPEC gained market share, from 30% of global production in 1983 to over 40% by the end of the 1990s.[3]

Then the cycle turned: the lack of alternatives to OPEC and the accelerating oil demand through the 1990s pushed oil prices up again, starting in 2003, to $110 this June.

High oil prices released a flurry of global investments in new exploration and in alternatives, which became financially rewarding. This is evident from the large oil and gas discoveries that were made in Uganda, Mozambique, and Brazil in the last decade. Uganda wasn’t known to have any appreciable hydrocarbon reserves. But in 2006, UK-based Tullow struck oil in Uganda—an estimated 6.5 billion barrels of reserves.[4] Similar large discoveries of natural gas have been made in Mozambique, which can be brought to the world market as liquefied natural gas (LNG).

But the largest new finds, both conventional and unconventional, have come from the Americas. Brazil, already an important oil producer, has added a total of 5 billion barrels to its oil reserves over the past decade. Shale gas in the U.S., the oil sands of Canada (reserves at 167.8 billion barrels), and the Orinoco heavy crude of Venezuela (reserves of 220 billion barrels), are examples.[5] Canada and Venezuela alone account for a quarter of the world’s oil. Argentina also has large shale oil and gas reserves.

Technology has brought about dramatic improvements. Cheaper and more plentiful natural gas is now used as vehicle fuel. From 2008 to 2013, the number of natural gas-driven vehicles globally has gone up almost 80% to 17.73 million.[6] It is still only 2% of all vehicles, but increasing. Additionally, the focus on energy efficiency has been intense, especially in advanced economies like the U.S., Japan, Germany, UK, France, Spain, and Italy. In 2003, they accounted for 43% of world oil consumption, but a decade later, but by 2013, it was 34%—a drop of 3.5 million barrels per day.[7]

The boom-bust pattern is predictable. The oil shocks of the 1970s led to lower energy prices. But the same lethargy in exploration set in, and after a generation, the global oil market found itself at the same spot—lacking alternatives, and at higher price levels.

This time too, the pattern is similar, but with two additional considerations:

1. China, the second largest oil consumer in the world, may be nearing its consumption peak. Its infrastructure build-out is complete, and growth is starting to slow. In the recently inked U.S.-China climate deal[8] it pledged to peak its emissions by 2030. India’s smaller economy is less energy-intensive, and is unlikely to impact the global oil market in any major way—at least in the near future.
2. Renewable energy sources—sun and wind—are now large and critical enough to dent the demand for fossil fuel. From 0.67% in 2003, they now comprise 2% of world energy supply. By 2035, renewable energy will be 7% of global energy mix—a fifth of new demand over the next two decades.[9]

That means continued low and stable oil prices for at least two decades.

U.S. speculators claim that the powerful OPEC, by keeping prices down, is sabotaging the development of the U.S.’s shale resources.[10] This is unlikely. Most shale oil is produced by private companies, which can stay profitable with prices at the current rate of $70 per barrel. But most OPEC members are countries that need oil to stay at least at $90 per barrel, to run their energy-export dependent economies.

Speculative panic has pushed up prices in the past, when the oil business had little spare capacity. The oil markets today have become too deep to manipulate financially, and there is enough spare production capacity to rule out panic. Events of the past few years show that political unrest, civil war, and terrorism have not impacted oil production or the infrastructure of major producing nations such as Iraq, Nigeria, or Libya. Indeed, terrorists depend on illegal oil exports for financing their world domination objectives.

Where does India fit into this picture? Barring a catastrophic geopolitical event like a major output disruption in Iran or Saudi Arabia that forces prices back up, oil will stay low. So India’s fuel bill is set to fall drastically and remain there through the Modi government.

Now is an appropriate time for India to build its strategic petroleum reserve—currently at a miniscule 10 days worth of oil (compared to 90 days of petroleum stocks for IEA members). [11], [12] India should lock in the additional barrels today at these lower prices, for delivery over the next few years. Additionally, tying up supplies with emerging energy suppliers in both north and south America will help to diversify dependence away from West Asia.

Finally, New Delhi can invest in a more energy-efficient economy. Petroleum products in India are used mainly for transporting goods and people. Investment in public transport and stringent standards for vehicle fuel consumption are easy to mandate. After years, a major global shift—low energy prices—has provided India an opportunity to improve energy security and shock-proof the economy.

Amit Bhandari is Fellow, Energy & Environment Studies, Gateway House.

An abridged version of this article appeared on the Financial Times.

This article was exclusively written for Gateway House: Indian Council on Global Relations. You can read more exclusive content here.

For interview requests with the author, or for permission to republish, please contact outreach@gatewayhouse.in.

References

[1] Lawler Alex, David Sheppard, and Rania El Gamal, Saudis Block OPEC Output Cut, Sending Oil Price Plunging, Reuters, 28 November 2014, <http://in.reuters.com/article/2014/11/27/opec-meeting-idINKCN0JB13O20141127>

[2] Reserve Bank of India, India’s Foreign Trade: 2013-14, 11 August 2014, < http://rbi.org.in/Scripts/BS_ViewBulletin.aspx?Id=15068 >

[3] British Petroleum, BP Statistical Review of World Energy 2014, 1 June 2014, <http://www.bp.com/en/global/corporate/about-bp/energy-economics/statistical-review-of-world-energy.html>

[4] Elias Biryabarema, Uganda Ups Oil Reserves Estimate by 85 Pct, Finds Natural Gas, Reuters, 29 August 2014, <http://www.reuters.com/article/2014/08/29/uganda-oil-idUSL5N0QZ1EW20140829>

[5] British Petroleum, BP Statistical Review of World Energy 2014, 1 June 2014, <http://www.bp.com/en/global/corporate/about-bp/energy-economics/statistical-review-of-world-energy.html>

[6] Natural & Biogas Vehicle Association, Statistic Records – 2008 to 2013, <http://www.ngvaeurope.eu/records/statistic-records/>

[7] British Petroleum, BP Statistical Review of World Energy 2014, 1 June 2014, <http://www.bp.com/en/global/corporate/about-bp/energy-economics/statistical-review-of-world-energy.html>

[8] The White House, Office of the Press Secretary, Fact Sheet: U.S.-China Joint Announcement on Climate Change and Clean Energy Cooperation, 11 November 2014, <http://www.whitehouse.gov/the-press-office/2014/11/11/fact-sheet-us-china-joint-announcement-climate-change-and-clean-energy-c>

[9] British Petroleum, BP Energy Outlook 2035, <http://www.bp.com/content/dam/bp/pdf/Energy-economics/Energy-Outlook/Energy_Outlook_insights_2035.pdf>

[10] Olson Bradley, Oil Billionaire Hamm Loses Half His Fortune in Three Months as Price Plummets, Bloomberg, 2 December 2014, <http://www.bloomberg.com/news/2014-12-01/billionaire-shale-pioneer-says-drilling-will-slow.html>

[11] Indian Strategic Petroleum Reserves Limited, <http://www.isprlindia.com/aboutus.asp>

[12] International Energy Agency, Explanation of the Closing Oil Stock Levels in Days of Net Imports Table, <http://www.iea.org/topics/oil/oilstocks/>