By R. Sasankan

The international market for crude oil has been in a state of ferment this year. Large producers like Saudi Arabia have announced production cuts while the smaller ones have resisted pressure to join forces in a collective effort to crank up prices. At the same time, a lot of forecasters now predict that crude demand will increase by 2.4 per cent in 2024. Given the robust economic growth in the US, the market is increasingly tilting towards a soft landing, dimming the chances of a recession that had been gloomily forecast earlier. The unprecedented heat wave that has swept across the US and Europe has also jacked up demand for electricity, providing a further fillip to the energy markets.

All these factors have pushed the Brent crude price way above the $80 mark. Both Saudi Arabia and Russia are bent on pegging it at that level or even pushing it higher by controlling production. Incidentally, Libya is in turmoil again and its 700,000 barrels a day are no longer flowing into the crude markets.

The emerging crude oil price scenario must have triggered anxiety within India’s ministry of petroleum and natural gas. India imports 87 per cent of its crude oil needs. The price discounted Russian crude came out of the blue and provided an unexpected relief to the Indian government and private oil refiners. Russian crude accounted for 24.2 per cent of India's oil imports totalling 280.41 million tonnes, or 2.06 billion barrels, in the 14 months to May. During the period, Russia displaced traditional heavyweights like Iraq and Saudi Arabia to emerge as India's largest supplier of crude.

The Ukraine war ignited unprecedented confusion in the international oil and gas market with the price of LNG in the spot market leaping to an all-time high of $ 52/mmBTU. India’s leadership -- more particularly the ministry of petroleum and natural gas -- has managed the oil supply situation remarkably well. Prime Minister Narendra Modi’s rising image in the international arena and external affairs minister S. Jaishankar’s diplomatic skills and eloquence made the task easier for the petroleum ministry headed by Hardeep Singh Puri, who has proved to be an honest, straight-talking minister. The personal integrity of the minister in charge of the cash-rich petroleum sector is vital for a large oil and gas importing nation like India. Let it also be said that upright leaders like Puri have rarely occupied the hot seat in Shastri Bhavan.

But this is where reality starts to kick in.

The price discount on Russian crude will not stay forever; it will shrink, and that process has already begun. President Vladimir Putin cannot be expected to accord special treatment to India indefinitely. But at the same time, he will be loath to lose the opportunity to sell Russian crude in such a large market like India. After all, India is critical for the success of Putin’s strategy to enhance Russia’s influence over world trade and specifically in the global energy market.

India cannot be ungrateful or churlish either. It has benefited enormously from the supply of cheap Russian crude during a period of economic turmoil wrought by the Ukraine conflict. Having acknowledged that truth, it is time to pose an uncomfortable question: should a country like India allow its oil import strategy to be so deeply influenced by the temporary discount offered by a new crude supplier?

I have had the privilege of interacting with a few genuine oil experts on this issue. They are of the view that a country like India should not make a sudden switch to discounted Russian crude.

Oddly enough, they have drawn attention to China’s pragmatic approach towards sourcing of crude. China has bought massive quantities of Russian crude (possibly at much higher discounts). But that has not stopped it from doubling its offtake from Iran; it has also been firming up deals with Saudi Arabia. China has reportedly built up a billion barrel stockpile of commercial and strategic reserves. It is unclear why China is hoarding such huge stockpiles other than the fact that the Russian crude is probably reaching China at the highest discounts. Iran has also offered crude to India in an attempt to return to earlier levels of trade.

The surge in Russian crude oil supplies to India was at the cost of OPEC whose share in India's oil imports fell to 46 per cent in April 2023 from 72 per cent in the year-ago period. The Middle East is geographically close and India has very friendly relations with all the oil producers there. An energy sourcing policy that is tilted heavily towards Russia ignores the advantages of obtaining substantial amounts of crude from the Middle East.

Energy experts want India to look at the long term and not over obsess about trying to find cheap crude in the short term. In their view, the most sensible option for India is to invest in integrated (upstream, mid-stream and downstream) oil and gas assets in stable countries or countries that have a long-term strategic dependence on India. Russia is important; the United States is equally important. GAIL has already started to sniff around and trying to gauge its chances of picking up a stake in valuable gas assets in the US. Other petroleum giants need to follow GAIL’s lead and scout for opportunities as well.