The international crude oil price war has just got sharper. Joe Biden and the US administration have decided to take on the Saudis for cutting oil production and the G7 block of advanced countries is pushing forward for a price oil cap on Russian crude.
India, an importer of 85% of its crude requirements, has been playing a balancing game, but now finds itself in the midst of the crossfire. With Brent crude prices expected to cross $100 a barrel, the economic headwinds are becoming stronger.
In July, this year, Joe Biden visited Jeddah, and in a controversial fist-bump diplomacy, made up with Saudi Arabia’s de facto ruler Mohammed Bin Salman (MBS). US-Saudi relations had been on a freeze ever since journalist Jamal Khashoggi was killed at MBS’ instance, but Biden justified the unpopular move arguing that the Saudis, as the world’s largest oil exporters, had to be assuaged. Oil prices had to kept in check and Russia denied the advantage of oil revenue if the Ukraine war was to be won.
OPEC production cut
Now the strained compromise is in tatters. The Saudi Arabia led OPEC+ group of 23 oil-producing nations, including Russia, have decided to cut oil production by 2 million barrels a day to push up prices. Earlier, fears of a worldwide recession had depressed prices to below $80 a barrel. More importantly, the Saudis refused to heed warnings from the US not to increase prices and form cartels with Russia.
Senator Bob Menendez, the influential chair of the US’ Senate Foreign Affairs Committee, called for a blocking all arms sales to Saudi Arabia, and US President Joe Biden lost no time and,in an interview on 10 October, warned Saudi Arabia of unspecified “consequences”.
On another front, the G7 block has been pushing for some time for a cap on Russian oil prices. The move has a two-fold objective. First, it is to cool energy pricescurrently spiraling out of control in Europe and elsewhere. Second, as crude prices have climbed, Russia has made a windfall selling discounted oil to countries like China and India. These revenues are funding Russia’s ‘illegitimate’ war in Ukraine, which the G7 group wants to choke.
Higher oil export volumes, coupled with rising petrol prices, will boost Russia’s earnings from energy exports to $337.5bn this year, a 38 % rise from 2021, it is estimated. In fact, the Helsinki-based non-profit think tank Centre for Research on Energy and Clean Air (CREA) says Russia’s earnings from oil, gas and coal exports in the six months since it invaded Ukraine, at around $154 billion, have outstripped the total cost of the invasion.
Meanwhile, the move to cap Russian oil prices, first mooted mid-year by US Treasury Secretary Janet Yellen to reduce the country’s oil revenues, may have the opposite effect. With the repeated cuts in OPEC’s production, the increased volatility may lead to a spike in oil prices. Russia has warned that it will stop selling oil to any country that joins the oil price cap embargo. This will only choke supply further. A UBS estimate says if Russia makes good its threat, Brent crude could breach $125 per barrel.
Caught in the cleft
With no signs of the Ukraine war waning, the impact on rising crude prices on India is expected to be severe. As the world’s third highest oil consuming and importing nation after the US and China, India spent $119 billion in FY 2022 on oil purchases, almost double - $62.2 billion – spent in the previous financial year. India’s imports have also risen to 212.2 million tonnes in 2021-22, from 196.5 million tonnes in the previous year.
‘Fuel and power’ accounts for 13.20% in the Wholesale Price Index (WPI), and ‘fuel and light’ 6.8% in the Consumer Price Index (CPI). The cascading effect of oil on inflation cannot be underestimated. Last year in October, the Reserve Bank (RBI)said every 10% increase in crude oil prices could push domestic inflation by 30 bps.
In these circumstances, the reluctance in New Delhi to join the oil price cap alliance against Russia is understandable. Russian crude after all is delivered at a discount of $15-$20 a barrel, including cost of transportation. Union minister for petroleum and natural gas Hardeep Puri said the government “will have a look” at the oil price cap proposal; but internally the die has been cast.
The flip side is there will be long term consequences for breaking the G7 sanctions. Even though in value terms, Russian oil imports have risen phenomenally from just 6% at the beginning of the financial yar to about 18% currently, India continues to be dependent on other international sources. India’s economic ‘coupling’ with the West too is far stronger than with Russia, and therefore the risk of US-led sanctions is more serious. As usual, we are again caught between the rock and a hard place!