Why in the news? 

The war in the Middle East, Russia, and Ukraine, and sanctions by the US have eventually resulted into a fragmented market in the petroleum industry.

Causes of Fragmentation in the Petroleum Industry:

• Impact of Sanctions: The sanctions imposed by the US on countries like Venezuela, Iran, and Russia have led to a fragmentation of the petroleum market, with trading relations becoming more regional than global. This fragmentation has reshaped the dynamics of oil supply and demand, with different regions relying on specific suppliers based on geopolitical circumstances and sanctions
• Regional Trading Patterns: Trading relations in the petroleum industry have shifted regionally, with the US emerging as a major supplier of LNG and products in Europe, Russia becoming the largest supplier of crude to India, and Iran focusing on exports to China despite Western sanctions. This regionalization of trade has altered traditional market dynamics and diversified supply chains.
• Challenges Faced by Oil Companies: International petroleum majors are experiencing solid profits due to higher production and prices of oil and gas. However, they are confronted with the need to reconcile their investment strategies with net zero carbon emission targets. This balancing act poses a significant challenge for oil companies as they navigate between profitability and sustainability goals
• Geopolitical Uncertainties: The ongoing conflicts in the Middle East, particularly between Israel and Iran, have added to the complexities of the petroleum market. The region, which holds a significant portion of the world’s petroleum reserves, is facing a mix of warfare, racism, and radicalism, contributing to heightened tensions and uncertainties in the oil industry
• AI Industry’s Energy Demand: Increasing energy demand from the artificial intelligence (AI) industry for data centers, cloud storage facilities, and crypto mining. This growing demand for electricity poses a challenge as renewables may not be able to meet the requirements, leading to a dilemma for industry leaders committed to achieving net zero carbon emissions.

What needs to be done?

• Diversification of Energy Sources: To mitigate the impact of geopolitical uncertainties and sanctions-induced market fragmentation, there is a need for countries to diversify their energy sources.
• Strengthening Regional Cooperation: Regional cooperation agreements and partnerships can help stabilize petroleum markets and ensure energy security.
• Promotion of Energy Efficiency: Improving energy efficiency across various sectors, including transportation, manufacturing, and residential buildings, can reduce overall energy consumption and lessen dependence on petroleum products.

Mains PYQ: 

Q Discuss the multi-dimensional implications of uneven distribution of mineral oil in the world. (UPSC IAS/2021)

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