By Subrata Majumder
Recently, OPEC and some non-OPEC countries, including Russia, announced oil output cut of around 1.16 million barrels per day. This move will bring the total volume of oil cut by OPEC + to 3.66 million bpd, according to Reuter’s estimation. Eventually, the output reduction could lift oil prices by US $ 10 per barrel, according to Pickering Energy Partners. The voluntary cut will start from May and continue till the end of the year.
Panic hovers in the country on the eventuality of the rise in global oil prices. The immediate impact is the burden on inflation. As and when OPEC hiked the oil price, India faced a major headwind to its growth earlier.
Nevertheless, the current hike in global oil price could provide some space for India’s resilience, with Russia emerging as the major supplier. Russia could be a major shield, given the surge in oil imports from this country.
Russia is the second largest producer and exporter of crude oil in the world. Notwithstanding, Russia has never been a better friend for India in supply of energy , despite having a close political and defence relation over six decades. It is an irony.
Oil is one of the primary energy in India. Nearly 30 percent of total energy is generated from petroleum crude oil. Others are coal, which is the biggest energy, natural gas, hydro and nuclear. The irony of India’s energy resources is that while almost all the energy are domestically procured, oil is an import intensive energy. More than 90 percent of crude oil is imported in the country.
Given these structural imbalance between oil and other energy availability, oil has been a major sensitive issue for the country’s inflation and the economic growth. As and when world reels under oil price hike, it has major impact on India’s inflation and the economy. Since OPEC is the major supplier of oil to India, any move by OPEC to increase oil prices derails the momentum of growth. Around 70 percent of oil was imported from OPEC in 2021 in India.
Nevertheless, the era of OPEC dependency is plummeting with the outbreak of Ukraine war and the USA and EU sanctions on Russia. A new era began with a major shift to Russia, leaving OPEC in the back bench for import of oil. During April- January 2022-23, import of crude oil from Russia sparked to nearly 20 percent of total oil import, or 38 million tonne , a big leap from merely 2 percent or 4 million tonne during the preceding period last year.
It was not only the quantum jump in imports of oil from Russia, but also it was the cheapest among all OPEC majors supplying oil to India. During April – January 2022-23, the ten month average price of Russian crude oil imported was US $ 87.7 per barrel, as compared to US$101.5 per barrel from Saudi Arab, US$ 95.4 per barrel from Kuwait and US$ 92.6 per barrel from Iraq.
Even though Russia is also included in the OPEC move for cut in production, which ultimately means rise in Russian crude prices, it is unlikely that Russia will increase the oil prices at par with OPEC for India. Given the cordial political relation between India and Russia with the inception of India-Soviet Friendship Treaty in 1971 and India’s neutrality in Ukraine war, it is unlikely that Russia will increase oil prices for India substantially.
India’s increase in import of oil from Russia could be benign to war trodden Russian economy. India is the second largest importer of Russian crude oil, after China. This will accrue larger revenue to Russia. This will help Russia to import largely from India. India is one of the biggest exporters of consumer items to Russia.
To tide over the sanctions, India and Russia have set up alternative arrangements. Indian refineries have accepted Russian insurance. Russian oil suppliers are trying to handle Urals oil transport to India themselves, using their own vessels and shipping arrangement. Further, Indian government has permitted nine Indian banks to open vostro accounts with Russian banks. This will facilitate to deal with Russian oil in rupee trade in currency swapping deal. Indian UCO bank has opened the vostro accounts with Russian Gazprombank and VTB banks
In India, oil based energy is largely used for transportation and cooking gas. In the event of lacklustre railway facilities, majority of consumer items, particularly food items, are transported by road vehicles. Eventually, whenever there is global oil price hike, leading to rises in petrol and diesel prices, it has cascading impact on inflation, which includes mostly consumer items like food items, energy and others. To this end, the surge in import of oil from Russia and at the cheapest price, will likely increase India’s resilience to OPEC oil price hike.
In summing up, it will be a great opportunity for the first time for India to escape any major impact on inflation owing to global oil price hike, after the oil dependency on OPEC plummets. (IPA Service)