By-Dr Manish Kumar, Assistant Professor of Economics & Mr Mukul Das, Research Scholar, SRM University AP
Picture waking up one day to learn that your ability to turn on the lights, have LPG cylinders delivered, and get fertilisers to farmers all depends on someone who decides thousands of miles away, in a country you may never visit. This is not some hypothetical situation facing India today; this is the current situation.
What’s going on? The Strait of Hormuz is a narrow 33-kilometre-wide passage of water through which almost 20% of the world’s oil passes daily. Right now, this section of the sea is only partially open due to ongoing military tensions between the US and Iran. There has been a slight decline in the price of oil recently, dipping below $75 per barrel; don’t let this lull you into thinking that the situation has normalised or calmed down. Countries are using their emergency oil inventory much quicker than they would normally do, and no one has any idea of when oil will flow freely again.
For the majority of us, this type of news seems far away — a concern for the economists and the news anchor on TV to worry about. However, even if it is your first time looking for petrol, you’ll see that the impact of this crisis is reaching you on your petrol pumps and electric bills. It even shows up in the price of onions.
Why India Feels This So Much
According to research, India is a net energy importer, and crude oil is no exception. In fact, India imports around 90% of the crude oil it consumes from foreign nations. A significant percentage of the natural gas and the gas equivalent found in household gas cylinders (approximately 50% and 60%, respectively) is also imported to India. In light of India’s significant population (1.4 billion) and relatively slow economic growth, this growth presents its own risks.
Whenever the Indian currency depreciates relative to the USD (which has occurred frequently in recent years), the same physical barrels of crude oil must be purchased at an increased cost. Consequently, due to the cascading effect, in many instances, these increased prices are experienced not only when filling up with fuel but also through increased costs associated with farming, transportation, manufacturing, etc., most notably affecting poorer populations.
There is much overlap between the current state of oil prices and the oil crises of the mid-1970s. Like before, price inflation can occur, while at the same time, economic growth rates can in some cases decline; this is known as stagflation. The uncertainty of oil price increases associated with the uncertain future of the global economy may create similar experiences for countries relying heavily on imported crude oil for their economic lifeline, as was last experienced by many countries in the decade of the 1970’s.
Unlike most major industrialisedorganisations (OECD), India is not a member of any major energy security alliance of nations that have obligations to supply members with energy or crude oil in emergencies. In essence, India is dependent upon negotiations, diplomacy and quite often mere improvisation, to secure supplies in an uncertain world.
It’s Not Just About the Route — the Source Itself Is at Risk
We have discussed chokepoints (a narrow channel being effectively pinched off), but a much larger threat is the actual attack on oil and gas facilities in places such as Saudi Arabia, the UAE, Qatar, Kuwait and Bahrain. One illustration of this is the Iranian missiles that have struck Qatar’s Ras Laffan Facility (which is one of the largest liquefied natural gas terminals in the world), which have damaged production and, as a result, some of the contracts to export from the area were cancelled. The impact of the aforementioned types of attacks is not only a delay in oil and gas production, but they will also result in lower production levels of oil and gas because the attacks occur. Therefore, with such incidents pushing India toward sources of hydrocarbons farther away, including suppliers, the costs of supply will be higher, and the reliability of supply will be less than when the natural supply sources that are close, cheaper and reasonably reliable are threatened.
How India Has Been Coping
India deserves credit for its adaptability. In response to the high cost of oil from the Middle East, India has turned to importing oil from Russia at discounted prices before volumes ended in April 2022. The cost savings from purchasing Russian oil have eased the impact of many disruptions to shipping routes and dramatic increases in insurance for shipping to the Gulf region. Nevertheless, while Russian tankers continue to arrive in industrial Indian ports as they did prior to the conflict in Ukraine, the current arrangement is not the most amenable to diplomatic relations and comes with additional costs due to US sanctions and tariffs on Russian oil.
Additionally, there is potential for using crude oil from Venezuela, although it contains a higher density of crude, making it less desirable for many refineries. Furthermore, the recipient nation must deal with additional logistics costs to import Venezuelan crude that are primarily due to the long distance between Venezuela and India.
Historically, Iran has provided India with significant quantities of crude oil; however, Iranian oil cannot be imported into India due to sanctions imposed by the United States. Furthermore, India has no suitable alternative suppliers of crude oil in the Gulf as those suppliers are embroiled in regional instability.
The Human Cost
This isn’t solely a financial issue but also one that severely impacts the lives of millions of people. There are millions of Indians living in the Middle East who work in oil fields, ports, ships, and factories, among other things, many of whom have died as a result of unrest. In contested waters, Indian sailors on commercial vessels have been affected by this unrest, which has resulted in numerous deaths believed to be related to US Naval operations in the region, to the extent that the Indian government has summoned US diplomats on behalf of their minister of external affairs (S. Jaishankar) to make public statements on the matter. Below the surface, behind the numbers and the headlines, there are real people (Indians) whose safety has been directly impacted as a result of this crisis.
America’s Confusing Role
The US is in an unusual dual role; on one hand, it has taken military action that has restricted how much oil Iran can sell and its sanctions have increased the price Indian consumers pay for Russian oil; on the other, it has become one of the primary suppliers of natural gas to markets previously supplied by the Gulf and it currently controls the flow of oil from Venezuela as a result of recent developments in that country.
So they are both part of the crisis and at the same time trying to be part of the answer as well. This leaves the country of India in an awkward position, as it’s been historically one that has wanted to remain neutral and keep options open by not getting too close to any particular superpower.
So What Should India Actually Do?
It may feel easy to say something like ‘Just switch to renewable energy’, and in fact, the growth of solar energy in India has been encouraging. But for solar and wind, energy production is completely dependent on when the sun is shining or when there is wind. For such critical operations as running hospitals, factories and data centres 24/7, there will continue to be a need for reliable, consistent energy sources that do not rely on weather conditions. Europe’s experience in recent years has demonstrated just how difficult it is to meet peak demand when a large portion of the power supply comes from renewable sources.
Therefore, two options need further focus in the near term: clean, coal-fired power plants and an accelerated move toward nuclear power generation. Nuclear energy is typically not given the credit it deserves in discussions in India, as it generates power without creating carbon emissions once a plant is running and does not require constant imports of fuel.
The transport sector has the best opportunity to reduce oil consumption because the bulk of our imported oil goes towards transport, so increasing public transport (electric fleet, rapid-transit metro systems, increased rail freight options as examples) is realistically the best approach. Biofuels may sound appealing, but they have trade-offs with both food and water use; therefore, they require careful consideration before fully committing.
The Bigger Picture
As we have spoken about Atmanirbharta (self-sufficiency), within defence or semiconductor production, we should also be serious about energy as well, with investment in refining capacity as well as emergency reserves and the full energy supply chain (not just a reaction to the most recent issue hitting the news).
It would be nice to think that this is only a temporary storm and things will revert to normal; however, since COVID, there have been continuous disruptions such as supply chains -rather geopolitical supply chains – and energy markets; therefore, it appears that this is how the world will be operating going forward, rather than being an exception to how the world operates.
Gasoline prices could drop soon, but even if they do, don’t become complacent! Today’s higher gas prices are merely a reflection of our current markets’ volatility. They’re a reflection of the massive structural problems in our domestic and foreign energy markets that continue to plague us. While gas prices may drop temporarily, our structural issues have not changed and will require a committed effort from all segments of society — private, non-profit, and government — to achieve the transformation necessary to move India toward becoming the global economy it aspires to be. We must not just rely on luck as a solution, but rather we must work collaboratively and continuously to redesign our whole relationship with energy as part of an ambitious long-term global energy transformation towards a new energy economy over at least the next twenty years, not only through media campaigns.
