Ensuring stability in energy supplies vital

Sushma Ramachandran

Senior Financial Journalist

The manmade equivalent of a natural disaster is shaking the global banking system. For a change, the impact on India is not adverse. The oil markets are reflecting concerns over the banking crisis by pushing prices downwards. So, after a year of high rates, the benchmark Brent crude is now ruling at $75-78 per barrel. This is roughly the same level as before the Ukraine conflict broke out last February. It is unalloyed good news for an exchequer that has had to cope with a rising import bill for the 2022-23 fiscal.

What is even more encouraging is that predictions for 2023-24 are now moderating from earlier forecasts of $100 per barrel made by Goldman Sachs. The investment bank has lowered its sights and is now talking about a level of $94 by the end of the year. While this is still not comfortable for a country that imports 85 per cent of its crude oil needs, it indicates that a softening trend is expected to continue for the rest of the year.

Forecasts of oil prices, however, are notoriously unreliable.

No one would have anticipated a black swan event like the Ukraine war to occur and reverberate in oil markets to such an extent that prices would touch $139 per barrel. Neither would oil industry experts have expected a zero-Covid policy in China to reduce global demand to such an extent that prices begin to slide from October last year.

The current banking crisis was also unforeseen given that the 2008 financial crash is considered a distant memory that is not likely to be repeated. The argument given is that newer stringent regulations have been put in place for banks all over the world. And yet, California-based SVB collapsed, while Swiss flagship Credit Suisse had to be taken over by UBS. Still more chaos could be in the offing as shares of Deutsche Bank are reported to be tumbling.

The net result is that the prospect of recessionary conditions depressing demand has made oil prices fall over a 10-day period from $86 to $73 per barrel. Yet, the dip in prices has not come soon enough to reduce the oil import bill in any significant way for the 2022-23 financial year. Oil purchases are likely to touch $200 billion, nearly double of the $118 billion recorded in 2021-22. The pandemic fiscal — 2020-21 — had an unusually low import bill of $63.5 billion owing to the crash in prices following the advent of Covid.

The burden on the exchequer would have been even higher during the 2023 fiscal but for the availability of Russian crude oil at discounted rates. When supplies began to be sourced from that country, it was offering crude oil at rates $16 cheaper than the then average price of $110 per barrel. The discounts continued since then, ranging from $8 to $12 per barrel. Rough estimates are that the country has saved over $3 billion by buying Russian oil rather than relying on traditional suppliers in West Asia.

This policy decision was taken despite pressure from western countries to join the ban being sought on buying Russian oil supplied via the sea route.

One of the ways to prevent countries from buying it was to direct insurance and shipping companies to abstain from dealing with Russian supplies. These efforts did not succeed, however, and were followed by the move to put a cap on prices of Russian oil. But the ceiling of $60 per barrel was not an issue for India and China which were anyway buying it at lower rates.

India will need to continue to follow an independent policy on oil purchases as it cannot afford to get boxed in by western sanctions on Russia. Incidentally, the curbs on buying hydrocarbons from that country did not apply to supplies going overland by pipeline since that would have affected Europe’s energy requirements. These were already constrained by Russia’s cutbacks in gas supplies through the Nord Stream pipeline as well as the subsequent damage to the pipeline.

But the ban on maritime imports of Russian oil and gas came into effect nine months after the conflict began in Ukraine. Imports of crude and petroleum products via pipeline continued to be exempt. The sanctions on Russian oil were thus evidently meant more for the rest of the world than the western countries.

At the same time, India needs to accept that it is more intertwined than ever before with the global economy. The latest international banking crisis is not expected to impact banks here, but there are other ramifications of such developments. These could be positive as in the case of falling crude oil prices but could also be negative in terms of affecting Indian investments abroad.

Even in the case of volatile oil markets, the country needs to keep a close watch on developments such as decisions being taken by oil cartel Organisation of the Petroleum Exporting Countries (OPEC). This dominating group has joined hands with Russia and other allies to form OPEC+ but continues to restrict oil supplies by fixing production quotas. Russia may be the outlier in the system and is now offering discounted rates. But it remains a part of the cartel which has a vested interest in hardening world oil prices.

Going forward, the country needs to remain watchful and cautious in dealing with all external entities in order to ensure stability of energy supplies.

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