Oil spills and slips at G20
India needs to continue its tight embrace of diplomacy while oil prices witness high volatility as we flit in the geopolitical diversity between Baghdad, Washington and Moscow.
Published: 31st March 2023 12:51 AM | Last Updated: 31st March 2023 12:51 AM | A+A A-
In the wake of growing economic fragility during the Asian financial crisis of 1999, G20 was founded to discuss and coordinate international economic and financial stability. Since then, other issues of global relevance have been on the agenda at the forum. Major foreign trade agreements (FTA) were inked on the sidelines of summits in the past, leading to the celebratory demise of crippling trade barriers. Of late, differences and divisions related to geopolitical tensions have surfaced.
The sixth G20 summit in 2011 focused on the need for incremental transparency in the energy market. As India hosts this year’s presidency, the energy market has become an important part of the dialogue after a decade. It is very relevant in the present global scenario amid Russia-Ukraine conflict and the imposition of sanctions on Russian crude.
The present situation bears similarities with the Yom Kippur War that led OPEC to impose an embargo on the US and other nations that supported Israel against its aggression on the coalition of Arab States, cutting off almost 65% of the supplies from the Middle East to the West. Ushering the infamous 1973 Oil Crisis, crude prices rose by a whopping 300% in six months. Coinciding with a dollar devaluation, a shadow of structural constraints and challenges caused much collateral damage worldwide. Impartial inflation diminished the value of oil-producing nations’ reserves in Western banks! The present-day EU embargo, the price cap on Russian crude and a dwindling US Strategic Petroleum Reserve (SPR) prompted oil analysts to be bullish. On the contrary, economic weakness across nations kept the prices low, and the recent banking tremors have dampened the mood further.
Groups like G20 are polite gatherings to discuss issues but ultimately, fundamental macro policy matters. Oil prices are endogenous vis-à-vis macroeconomics of the world economy and seldom affect the members uniformly. The effect is unique to each member based on the diversity of their resource endowments and economic stature, such as currency dominance.
Desisting from consensus, members prioritise their national interests. Ensuring the continuity of its supply source, Japan obtained exemption of the Sakhalin-2 crude from sanctions citing it as “energy security”!
Post-sanctions against Venezuela, beginning in 2015 and more stringent and comprehensive since 2019, the US considered the present regime a threat to democracy and sliding towards dictatorship.
The US is currently working towards rapprochement with Caracas, an ally of Russia. The intention is touted as “cutting to size” of Russia’s dominance in the oil market. Turkey, a member of NATO, continues to cooperate with Ukraine in the defence production sector, such as purchasing engines for stealth drones, while its import of Russian Urals touched a four-month high last February. Flirtatious by instinct, alliances of oil often slip out of prospective marriage!
India legitimately asserted its intent while continuing to buy oil from Russia. The move is termed by the US as “ethical and non-violative of the spirit of sanction”. Reliance Industries and Nayara Energy are believed to have lifted 40% of the Russian crude landing on Indian ports. For Reliance, the largest refinery in the world with a processing capability of all grades of oil and a production capacity of 1.2 million barrels per day, sourcing crude at the best possible price, regardless of the origin, makes sane business sense. Nayara Energy (erstwhile Essar Oil), 49% owned by Russia’s Rosneft Oil Co., produces the ESPO Blend crude oil, a favourite with Indian refiners due to its low sulphur content and high refinery throughput. While keeping their prices unchanged despite high oil prices, the state-owned refineries HPCL, IOCL and BPCL posted a combined net loss of over `21,000 crore in the half year ended September 2022. Cheaper Russian oil could assist in recovery.
In oil politics, shifts in ambitions and partnerships are fairly rampant. India has increased its sourcing to 30 countries. The prospect of exploration and production is under consideration in Guyana with its massive reserves and an impending partial exit of ExxonMobil. Keen to maintain its stellar role in the oil import scene, Iraq has initiated discussions on offering a discount for its Basrah crude oil with Indian refiners.
For a country like India, following a policy of multilateralism is in its best interest. Other members of G20 share a similar vision for energy security. A recent Xi-Putin meeting in Moscow transpired over cheaper oil for China. The US is slated to go oil surplus this year and is eyeing a bigger share in exports to China and India, the two largest consumers.
India needs to continue its tight embrace of diplomacy while oil prices witness high volatility as we flit in the geopolitical diversity between Baghdad, Washington and Moscow. Considered the fastest-growing economy among the seven largest and emerging economies, India needs to reinforce its currency in sustainable development, especially in energy. As the bank scrips piggyback broader markets downhill, the spectre of economic sluggishness and dwindling oil demand is resurrected. Though OPEC would consider production cuts should the prices dip lower, some OPEC members’ “fiscal straits” would deny them the luxury of such cuts. However, the current Brent Crude price rise beyond $75 offers a reprieve on the re-emergence of a “bullish trend” (Oil: Stealth And Valuation, TNIE Jan 19). Prices could increase substantially by the year’s end though a lot would rest on taming inflation and upending recession.
Energy security was a central theme during a run-up to the year-end summit at the India Energy Week last month. Climate change is vital, yet energy dependency and availability remain sacrosanct for all members. Motivated by the theme of “Vasudhaiva Kutumbakam”, the fraternity of G20 needs to revisit its raison d’etre in the context of imparting stability to the world economy, which in present times rests a lot on oil prices. Consensus and conciliation are the best way forward.
The salvation of mankind lies only in making everything the concern of all—Aleksandr Solzhenitsyn
Senior markets specialist and author