Context

• Despite the global decline in crude oil prices over the last month and buying of cheap Russian crude oil, the retail prices of Petrol and Diesel in India have remained high. These increased prices have also caused high inflation in India, leading to an increase in key policy rates by RBI.
• In this context, in this edition of the burning issue, we will study Global fuel dynamics and how it impacts India’s energy security.

Global fuel dynamics

• Global production of oil- averaged 95.6 million barrels per day in 2021. The top producing country group was OPEC (31.7 million b/d) followed by OECD (31.0 million b/d). The top three producing countries were the United States (18.9 million b/d), Saudi Arabia (10.8 million b/d), and Russia (10.8 million b/d).
• Price of oil- The average Brent crude oil spot price declined to USD100/bbl in August from USD112/bbl in July. Brent crude oil prices have sunk by over USD20/bbl after peaking in June, pressured by tightening monetary policies and demand concerns in China
• Demand of crude oil- Global liquids demand saw a slight increase in August to 99.4 MMb/d, but remained below June’s 100 MMb/d.
• Factors impacting prices- Oilgenerates revenue for countries with enough oil reserves to produce more oil than they consume. Not surprisingly, events such as unrest in oil-producing regions, new oil field discoveries, and advances in extraction technology profoundly affect the oil industry.
• Recent decline in prices- Benchmark Brent crude oil prices dipped to USD100/bbl in August – the lowest in the past six months. Elevated inflation levels, rate hikes by major central banks, and concerns about a slowdown in the Chinese economy have impacted oil and fuel demand, leading to a price decline.
• Natural gas- accounts for 32% of primary energy consumption in the United States, the world’s largest producer. Russia is the second biggest producer, and also has at least 37 trillion cubic meters of natural gas reserves, the most in the world. Also, there was a steep rise in the international prices of natural gas triggered by the Russia-Ukraine war disrupting global supplies

Why crude oil prices were high till last month?

(A) Limited Supply:

• Major oil-producing countries had cut oil production amid a sharp fall in demand due to the Covid-19 pandemic.
• The Russian-Ukraine war has disrupted the supply chains. Also, sanctions on Russia, Iran and Venezuela by the US have reduced supplies of crude in international markets leading to price rises.
• In early October 2022, OPEC agreed to cut back on oil production to increase prices.

(B) Revival of Demand:

• Theproduction and rollout of vaccines for Covid-19 and the rising consumption post the COVID lockdowns last year have both led to a revival in international crude oil prices.

(C) Geopolitical reasons:

• Geopolitical tension has risen between Russia, which is the second largest oil producer in the world, and neighbouring Ukraine.
• In January, there were drone attacks on oil facilities in UAE, another major oil producer.
• An outage on a major oil pipeline linking Saudi Arabia and Turkey further added to the pressures.

Impacts of Global fuel dynamics on the Energy Security of India

• Energy security of India is threatened– Sanctions on Iran & Russia and the reduction of oil production by OPEC have caused prices of Crude oil to sour to record high levels, making it unbearable for the economy and common man, thus negatively impacting the energy security of India.
• Current Account Deficit: The increase in oil prices will increase the country’s import bill, and further disturb its current account deficit (excess of imports of goods and services over exports). According to estimates, a one-dollar increase in crude oil price increases the oil bill by around USD 1.6 billion per year.
• Inflation: The increase in crude prices could also further increase inflationary pressures that have been building up over the past few months. This will decrease the space for the monetary policy committee to ease policy rates further.
• Fiscal Health: If oil prices continue to increase, the government shall be forced to cut taxes on petroleum and diesel which may cause a loss of revenue and deteriorate its fiscal balance.The revenue lost will erode the government’s ability to spend or meet its fiscal commitments in the form of budgetary transfers to states, payment of dues and compensation for revenue shortfalls to state governments under the goods and services tax (GST) framework.

Reasons for recent fall in crude oil prices

• Strengthening of US Dollar: For the first time since early February, international crude benchmark Brent went below $90 a barrel last week. This level was last seen before Russia invaded Ukraine. The recent decline came amid expectations of further US dollar rise due to Fed rate hikes.
• Reducing global demand: Global energy demand is softening, especially in China, where crude oil imports fell 9.4% last month compared to a year ago, as the country’s zero-Covid policy has led to full or partial lockdowns in more than 70 cities since late August.
• Fear of global recession: US Fed has been increasing the policy rate aggressively causing the Dollar to appreciate vis-à-vis other currencies and outflow of capital thus generating fears of a global recession and thus reducing the demand for oil in the future.
• Increasing Russian oil supplies: India is buying Russian crude in defiance of Western, especially US pressure, to isolate the country economically and financially. India is buying Russia’s flagship Urals grade at discounts of as much as $35 a barrel on prices before the war

But why fuel prices are still high in India?

• Non-passing of savings: Indian refiners are not passing on the cost savings derived from declining crude oil prices since last month.
• No government support to companies: Petrol was deregulated in June 2010 and diesel in November 2014. Since then, the government does not pay oil firms any subsidy to compensate them for losses they might incur on selling fuel at rates below cost.
• High losses: The three biggest oil retailers in India posted a combined net loss of Rs 18,480 crore in the June quarter.
• Recover past losses: No revision of fuel prices by oil marketing companies is to recover the losses that state-owned fuel retailers incurred in keeping the fuel prices unchanged when international oil prices surged to multi-year highs.

Current Energy scenario in India

• Aim: Indian Government aims to increase energy in India and reduce energy poverty, with more focus on developing alternative sources of energy, particularly nuclear, solar and wind energy.  India attained 63% overall energy self-sufficiency in 2017.
• 3^rd biggest energy consumer: The primary energy consumption in India grew by 10.4% in CY2021 and is the third biggest with a 6% global share after China and USA.
• The energy basket: The total primary energy consumption from coal (452.2 Mtoe; 45.88%), crude oil (239.1 Mtoe; 29.55%), natural gas (49.9 Mtoe; 6.17%), nuclear energy (8.8 Mtoe; 1.09%), hydro-electricity (31.6 Mtoe; 3.91%) and renewable power (27.5 Mtoe; 3.40%) is 809.2 Mtoe (excluding traditional biomass use) in the calendar year 2018.
• Import dependency: In 2018, India’s net imports are nearly 205.3 million tons of crude oil and its products, 26.3 Mtoe of LNG and 141.7 Mtoe coal totalling 373.3 Mtoe of primary energy which is equal to 46.13% of total primary energy consumption. India is largely dependent on fossil fuel imports to meet its energy demands – by 2030.

Challenges to Energy security in India

• Low domestic resources: India, with 17% of the world’s population, has just 0.8% of the world’s known oil and natural gas resources.
• High domestic demand: India’s domestic production is not sufficient to meet its demand. As a result, India already imports 80% of its crude oil needs. Without new and substantial domestic discoveries, imports will continue to increase.
• Volatile energy supply regions: Problems of diversification of energy sources for India arise from the political volatility, and geopolitics of the regions from where India imports its energy products like the Persian Gulf region, and countries like Russia, Iran, etc.
• Low share of natural gas usage in India: Natural gas currently provides only 8% of India’s primary energy supply despite the fact that 50% of that gas comes from domestic sources, onshore and offshore. Today, oil accounts for 36% of the country’s primary energy use. This figure is set to rise both in absolute and in percentage terms.
• Low Private sector participation: Private sector’s Cold response to Government initiatives and policies such as HELP and mine auctions.
• Lack of holistic policy: India currently does not have a holistic National energy policy but is divided into a national electricity policy, renewable energy policy, etc. leading to a lack of coherency in all energy sectors and ministries.

Energy policy in India

• In this context, in 2017, NITI Aayog published a draft National energy policy (NEP) with four key objectives of Access at affordable prices, Improved security and Independence, Greater Sustainability and Economic Growth.
• The draft NEP proposes actions to meet the objectives in such a way that India’s economy is ‘energy ready’ in the year 2040.

Some Draft NEP proposals for the Energy Sector

• India has nearly 3.17 million square km of sedimentary area, out of which only 19% has been moderate to well-explored. To quickly appraise the entire sedimentary area, there is a need to offer geological data to prospective Exploration and Production (E&P) companies.
• Setting up of 90-day consumption requirement of strategic and commercial storage, both for crude and petroleum products through innovative private investment strategies is needed.
• To increase the penetration of natural gas, a National Gas Grid would have to be rolled out throughout the country.
• There is a need to migrate the existing hydrocarbon regime (both Nomination and PSCs) to the emerging framework of market-determined prices and marketing freedom. However, this cannot be done overnight and needs to be achieved in gradual phases.
• OMCs have done a commendable job in maintaining petroleum supplies throughout the country. The next step in this direction is to encourage competition through the entry of the private sector in a big way, to raise efficiency and consumer satisfaction levels.

India’s Quest for Energy Security: The Steps Taken

• Exploring domestic energy reserves: To promote oil and gas production at the domestic level, the Indian Government has been taking several steps which range from encouraging Indian companies to increase their domestic activities and widening its engagement with multinational companies, broadening opportunities for them to participate in oil and gas exploration in India.
• HELP policy: Government has launched an Open licensing and acreage policy under the Hydrocarbon exploration and licensing policy (HELP) in 2017. The HELP marked an important transition from regulation to liberalization of India’s E&P sector; it is a very significant upstream reform of the fiscal regime.
• Policy and operational changes: to stimulate the investments and development in the exploration of hydrocarbon sources of energy, some of the steps have focussed on regulatory changes, a transparent gas pricing policy and redevelopment of uneconomical assets.
• Exploring alternative sources: The domestic efforts have also seen a concerted focus on exploring various alternative sources of energy that are infinite, renewable and environment-friendly. The government has given a massive push in this regard in energy production through solar energy, wind power, hydroelectricity power, and biomass, and nuclear energy.
• Diversifying energy sourcing regions: Two-thirds of India’s oil imports come from Gulf region. India is following in the footsteps of other major oil-importing economies and making significant efforts to obtain supplies from sources outside the Gulf such as regions of Latin America, Africa, the Caspian Basin, Russia and the waters of the Indo-Pacific region.
• Launch of NDR: In support of the OALP, the government launched the National Data Repository in June 2017. It is a comprehensive archive of geo-scientific data for E&P activities. By allowing companies to access the data through an e-platform and consult relevant information, the government helped the interested parties in making bidding decisions.
• Small field policy launched: Discovered Small Field Policy was launched in 2016 to tap unmonetized small oil/gas discoveries in India, Discovered Small Field provides an easy and low-risk investment option for interested parties to encourage E&P activities.

Way forward

• Reinforce its oil emergency response policy- to adapt it to the expected strong growth in oil consumption, with increased dedicated emergency stocks and procedures, including demand restraint measures and a proper analysis of risks by using oil disruption scenarios.
• Strengthen the regulatory oversight- of the sector. Non-discriminatory access to oil transport and the level-playing field in the mid-and downstream oil sector.
• Promote the diversification- of oil sources and reduce India’s high oil import dependence by enhancing exploration and production activities and the development of alternative sources, such as biofuels.
• Foster the creation of a liquid market- for natural gas in India, gradually moving from gas allocation and multiple pricing regimes to the creation of a gas hub, so that domestic gas and LNG imports can be used most efficiently and competition can flourish.
• Strengthen and clarify the roles and responsibilities- of the regulatory supervision of natural gas market activities (upstream, midstream and downstream) to ensure a non-discriminatory access regime to pipeline capacity so that both LNG imports and new gas discoveries can find their way to markets and investment in gas transport and storage is encouraged.
• Ensure gas is treated on a level playing field- with other fuels for taxation and is included under the GST, as the country strives to increase the share of gas in the total energy supply.
• Enhance international engagement- by India on global oil security issues.

Conclusion

• Nation has achieved a lot in the energy sector in recent years which has propelled it to become one of the largest economies in the world.
• But to continue on this growth path, India’s energy policy needs to be pursued more inclusively in its domestic and international settings to address its fast-growing energy demand in a competitive geo-political environment.