India’s Perspective on Oil Market Volatility

Crude oil prices in India followed a similar trajectory to leading global crude oil benchmarks, which in early 2015 fell to their lowest levels since April 2009. According to the Ministry of Petroleum and Natural Gas, thRm Indian Basket price of crude oil declined sharply from $110.42 a barrel in mid-June 2014 to $43.36 a barrel on January 14, 2015. [1]

This slump in global crude oil prices offered the Indian government an opportunity to be steadfast in its economic reforms by addressing both current account and fiscal deficits. While the price decline allowed the government to fill up its strategic petroleum reserves (SPR) and deregulate its downstream sector to reduce subsidy burdens, lower prices also stalled upstream investments needed for augmenting domestic production of hydrocarbons. This brief assesses the impact on India of recent oil price volatility and draws policy implications.

Economic Impact

The recent drop in crude oil prices could not have come at a better time for India. In May 2014, Indian citizens gave the newly elected Modi government the mandate to press forward on badly needed reforms to revive the economy and improve energy security. The biggest benefit of fallen crude prices for India, as one of the world’s largest oil importers, has been foreign exchange savings to the tune of $3 billion per month, even as the country continues to import 3.2 million barrels of oil a day. [2] Low oil prices have also helped reduce inflation to levels below 6%, as targeted by the Reserve Bank of India, which could bring India’s current account deficit to 1% of GDP, while reducing the fiscal deficit through fuel subsidies. [3]

Given these trends, the current government has received a rare opportunity to kick-start its subsidy reform process by deregulating the diesel price, which for the first time since January 2009 was cut by 3.37 Indian rupees a litre. [4] India’s public sector oil marketing companies have been some of the biggest beneficiaries of reforms. They have witnessed a sharp fall in under-recoveries of 50% during 2014–15, as well as lower working capital and interest costs.

The Impact on Environmental and Energy Security

Although the fall in the crude price has brought a new hope for the economic development of oil-consuming countries, it is worth considering the environmental implications of this trend for India. The proliferation of SUVs and other privately owned vehicles, which run on fuels like diesel and petrol, could significantly increase emissions. On the other hand, changing technologies and tightening environmental constraints will lead to low oil-intensive growth, significantly reducing energy-intensity levels. A case in point is India’s planned increase in solar energy capacity by fivefold to 100 gigawatts by 2020. [5] These efforts are part of a deliberate attempt by the Indian government to provide a cleaner atmosphere and healthier environment.

Policy Implications

Low global crude oil prices limit incentives for the upstream sector, particularly at the places where most of India’s prospectivity lies–in tough regions of deep and ultra-deep waters. Consequently, India has delayed the tenth round of its National Exploration Licensing Policy planning, which has a unique feature of uniform licensing policy, wherein the government had planned to facilitate production of all forms of hydrocarbons.

Therefore, while India waits for a more opportune time to make upstream projects viable, it should speed up crude procurement for its SPR. To this end, the country recently purchased two million barrels of Iraqi crude for its first SPR in Andhra Pradesh. In the downstream sector, the government should extend its deregulation process to both liquefied petroleum gas and kerosene to optimize the benefit of subsidy cuts.

Prospects for Regional Cooperation on Oil Market Stability

Given the high dependence on imported petroleum, the South Asian Association for Regional Cooperation (SAARC) may consider setting up a regional or subregional refinery to meet member states’ demand for petroleum products. Being a net exporter of petroleum products, India could take the lead in supporting such initiatives.

Further, because Iran is the most proximate oil- and gas-exporting nation to India, the U.S.-Iran nuclear deal, if finalized, could be useful in helping India meet its energy security goals. In addition to revisiting the Iran-Pakistan-India natural gas pipeline, India should secure long-term oil and gas contracts with Iran. India could then further process this crude from its surplus capacity refineries for export to South Asian markets, thereby meeting the demand for petroleum products from nations across the region.

All in all, low oil prices offer India more positives than negatives. India should move to quickly capitalize on this trend in order to not only satisfy its own energy needs but also quench the energy thirst of other South Asian countries.

Endnotes

[1] Ministry of Petroleum and Natural Gas (India), Press Information Bureau.

[2] Charles Ebinger and Vikram Mehta, ”Time to Act on U.S.-India Energy Cooperation,” in ”The Second Modi-Obama Summit: Building the India-U.S. Partnership,” Brookings Institution, Report, January 2015, 47–49.

[3] Sudheer Pal Singh, ”Lower Oil Prices to Keep Inflation under 6%, CAD at 1%,” Business Standard, March 17, 2015.

[4] ”Diesel Deregulated, Prices Slashed by Rs 3.37 per Litre,” PTI, October 18, 2014.

[5] Smiti Mittal, ”India Eyes 100 GW Solar Power Capacity by 2022,” Clean Technica, November 23, 2014.

Manish Vaid is a Junior Fellow at the Observer Research Foundation with research interests in energy security and geopolitics.