World held hostage to high oil prices set by Saudi, Russia

Sushma Ramachandran

Senior Financial Journalist

SAUDI ARABIA and Russia, the world’s largest oil exporters, have successfully managed to push crude prices up to levels last seen nearly a year ago. Evidently concerned about the softening trend in international markets since March this year, they acted in concert to cut production and ensure that prices went beyond the level of $90 per barrel. Several global investment banks have also been making forecasts that prices will touch $100 per barrel in 2024, a scenario that is worrying, to say the least, for emerging economies like India.

What is interesting is that both countries have close bilateral ties with New Delhi. In the case of Saudi Arabia, relations have been on the upswing in recent years and the latest visit by Crown Prince Mohammed bin Salman ended with eight joint agreements having been concluded. These were largely on the ways to utilising the $100-billion investment offer made earlier by Riyadh. Several projects were identified, including an oil refinery on the west coast designed to process Saudi crude.

As for Russia, the longstanding strategic relationship has turned into a deeper economic one after the outbreak of the Ukraine war. With oil prices having soared, India was able to buy Russian oil over the past year at a considerable discount to the vastly higher market rates. The result is that it has become one of the biggest crude oil suppliers, though discounts have reduced considerably.

Despite these warm ties, the two leading oil exporters have ensured that prices remain elevated in the world markets, much to the detriment of a country that imports over 85 per cent of its fuel needs. There is little concern for the impact on emerging economies like India. The drive to elevate oil prices will put a heavy burden on the exchequer here by raising the oil import bill, which reached $158 billion in 2022-23. The downside risks of even higher oil prices will grow further next year, judging by estimates made by a raft of global investment agencies, including Goldman Sachs and Citibank.

The oil cartel, the Organisation of the Petroleum Exporting Countries (OPEC) and its allies like Russia which now form OPEC+, had initially announced a production cut of 1.15 million barrels per day (bpd) in April. This did not alter the market movements much at the time. The prices were then ruling at around $75 to $80 per barrel. Voluntary production cuts of 1.3 million bpd by Russia and Saudi Arabia followed in July. These reversed the trend and prices began to firm up. It is the decision to extend these cuts to the end of the year that has caused a spike in the prices recently. The benchmark Brent crude is now ruling at around $92 per barrel while the US West Texas Intermediate crude is at about $89 per barrel.

The production cuts have come along with the news that the demand is set to rise from the world’s biggest importer, China. The US, on the other hand, is in no position to make grand gestures to stabilise the market, like releasing more oil from its strategic petroleum reserve. It already offloaded a large quantity last year and reportedly cannot afford to release any more from its inventories.

As the world is grappling with higher oil prices and the prospect of inflationary pressures reviving, the perspective of the OPEC+ leader, Saudi Arabia, is that it needs resources to develop infrastructure. It envisages a future in which the demand for fossil fuels may decline drastically and is preparing for this long-term eventuality. It has devised what is described as Vision 2030 to overhaul the kingdom’s economy, reduce dependence on oil and provide jobs through a massive infrastructure drive. It is clearly linked to predictions made by the International Energy Agency that the demand for fossil fuels will decline after 2030.

The West Asian country must also have kept in mind the experience during the pandemic when crude oil prices crashed to about $9 per barrel. This was for a brief period, yet it enabled India to buy large quantities to fill its strategic reserves. But it was unsettling for the oil-exporting countries, which are looking to mop up enough financial resources before the fossil fuel demand wanes in the long run.

For Russia, too, the need for resources to fund the Ukraine war is paramount in its strategy to firm up world oil prices. It is also facing domestic constraints, forcing it to ban the export of gasoline and diesel. This may be a temporary measure, but it has created more volatility in the market.

The question is — can the close ties between India and the two biggest players in the international oil market help in ensuring concessional prices for this commodity? Russia did offer oil at discounted rates last year when its traditional buyers in western countries decided to impose sanctions. This turned out to be a mutually beneficial arrangement as India was stymied by the skyrocketing rates of oil — over $100 per barrel — right after the Ukraine conflict began. The discounts are still available, but are lower than before. As a result, the cost of the Indian basket of crudes is now $93.93 per barrel as against $74.93 per barrel in June.

Saudi Arabia, on the other hand, has so far not given any concessions to countries of the Global South. The only relief given lately, after India shifted the bulk of its purchases from West Asia to Russia, has been the reduction in the so-called Asian premium. This is an extra charge for Asian buyers of Gulf crudes that has now been cut from $10 to $3.5.

In the face of such intransigence by OPEC+ leaders, India has no option but to prepare to deal with the economic impact of high oil prices. This will translate into inflationary pressures and a widening of the current account deficit. In the long run, it can shift towards renewable energy. But for many years to come, this country, along with the entire world, will continue to be held to ransom by countries that control fossil fuel reserves as these undeniably remain the primary energy resource for the planet.

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