Mitigating Instability in the Energy Market: What’s in it for India?

In a historic first, global energy markets witnessed the crude oil price plunge to sub-zero levels. While oil-producing nations are likely to face budgetary crises due to the ongoing market meltdown, the implications for oil-intensive economies like India are mixed: despite the pandemic-induced demand destruction, India’s crisis can be leveraged with the help of careful policy maneuvering.

Bhumika Sharma
May 08, 2020

The first week of March witnessed a striking development for the global economy. Talks between the Saudi Arabia-led Organization of Petroleum Exporting Countries (OPEC) and ten other oil producing countries, including Russia, collapsed after Russia opted against the output cuts proposed by OPEC. OPEC’s proposal suggested new production cuts in order to offset the unprecedented drop in global oil demand due to the coronavirus pandemic. The breakdown of talks also signaled a collapse in the Saudi-Russia partnership that has been in place since the two countries jointly signed an oil pact in 2016.

Saudi Arabia retaliated quickly: it decreased its official April selling prices by $6 to $8 per barrel, even threatening to increase its production levels, effectively starting a price war on oil. This led to the biggest single day drop in oil prices since the Gulf War in 1991, sending shockwaves across international financial markets.

Geopolitical Implications 

The rift in Saudi-Russia alignment over oil production had noteworthy geopolitical implications. While the short-term goal for Russia, like Saudi Arabia, seems to have been centered on capturing greater market share, its long-term motivation behind distancing itself from OPEC’s plan is arguably to get back at the United States – particularly the U.S. shale oil industry – after it imposed sanctions on the Russian State Oil Company, Rosneft, for its involvement in Venezuela, and its gas pipeline, Nord Stream 2, in a bid to protect Europe’s energy security

For the United States, which is gearing up for presidential elections later this year, a blow to the energy sector would be detrimental. It would likely lead to widespread job losses and bankruptcies, similar to the consequences witnessed during the oil price shock of 2014.

Another major oil-exporter potentially hit by this dynamic is Iran, which is already battling with a U.S.-led sanctions regime in addition to the coronavirus outbreak. A far-fetched political speculator has raised the idea of Russia leveraging its equation with Iran to further bolster Houthi rebels in Yemen to pressurize Riyadh. The Saudi-led coalition which has been involved in Yemen’s civil war since 2015, declared a unilateral ceasefire earlier this month.

Although Russia has a well-stocked sovereign wealth fund, a prolonged scenario of plummeting oil prices would invariably impact its national budget and further depreciate its currency. According to Fitch Ratings estimates, the Russian rouble will incur a 25 percent depreciation in the first quarter of 2020. Saudi Arabia must have factored in its massive external debt and the viability of funding its ambitious Vision 2030 plan, which made a prolonged oil war unfavorable. Thus, as it appeared certain that the price war would sooner or later come to an end, it essentially became a question of who blinks first. 

Energy Market Instability and the G20 Agreement

The Riyadh-Moscow feud further exacerbates an already unstable global energy market hit hard by the COVID-19 outbreak. On April 10, G20 energy ministers convened a virtual summit with the agenda of stabilizing energy markets and agreed on the biggest supply cut deal in history. The OPEC+ resolved to cut down production by 9.7 million barrels per day, accounting for 10 percent of the global oil demand. Although this effectively brought an end to the oil price war, apprehension over recovery of the physical market continues, as the deal might prop up prices without being hardly enough to fix the problem of plummeted demand and the storage crisis.

Market confidence remains low and the price of Brent crude, the global oil benchmark, dropped nearly 2.5 percent after the agreement was signed. In another historic first, on April 20, the May futures contract of the U.S. benchmark West Texas Intermediate (WTI) fell into negative territory, with sellers willing to pay $37.63 per barrel to buyers for delivery.  

Cutting to the Chase: What’s in it for India?

Although the global economy has been facing a severe downturn because of the pandemic-induced energy market meltdown, there are mixed implications for oil-intensive economies with a large appetite for consumption. India is the third largest consumer of crude oil in the world, with OPEC accounting for around 83 percent of its total crude oil imports. In fiscal year 2019, India spent $112 billion on oil imports.

For a country like India where the amount of oil used per unit of GDP is significantly high, the price reduction could lead to a massive decline in its annual import bill. Estimates suggest annual imports could decrease by at least $1.3 billion thereby providing a much-needed economic stimulus. India was in the midst of its worst economic downturn in a decade on top of a massive social upheaval triggered by the Modi government’s controversial amendment of the country’s citizenship law. The price crash will likely provide the impetus needed to ease the current account deficit, reduce retail inflation, increase exchange rate benefits, and so on.

In the long-term, the oil price crash strengthens the momentum for a transition to renewables, presenting an opportunity for India to promote investments in clean energy. Oil markets’ volatility have been one of the key factors strengthening green energy movements across the world. According to a recent statement by the International Renewable Energy Agency’s (IRENA) Director, Francesco La Camera, “renewables investment reached new heights in both 2014 and 2015, after the previous oil price crash in 2014.” 

India cut annual fossil fuel subsidies from $29 billion to $8 billion between 2014 and 2016. Some of the money raised was diverted to renewable energy subsidies, after Prime Minister Modi announced an ambitious goal to produce as much as 175 gigawatts (GW) of non-fossil fuel energy by 2022 as a part of India’s commitment to the Paris Climate Agreement.

Capitalizing on low prices and responding to IEA Executive Director Fatih Birol’s appeal to rebalance the demand-hit market, India is seeking to buy millions of barrels of oil for its strategic petroleum reserves. According to Oil and Natural Gas Minister Dharmendra Pradhan’s legislative briefing, India has built 5.33 million tons of emergency storage – enough to meet its oil requirements for 9.5 days.

However, there are certain offsetting effects as well. The pandemic-induced national lockdown has led to a collapse in the demand for oil in the country by as much as 70 percent. While upstream companies witness reduced cash accruals, downstream companies may suffer heavy inventory losses. The demand destruction and storage crisis has impacted the domestic oil refining sector. The Indian Oil Corporation (IOC), which owns a third of the country’s total refining capacity, has witnessed a decline in its retail sales by more than 50 percent since the beginning of 2020, compared with the same period a year ago. In fact, IOC has sent a force majeure notice that provides considerable leeway to companies from making payments during crisis periods, to most of its Middle Eastern suppliers.

Furthermore, depressed revenues for oil-producing countries with less diversified economies could mean depressed earnings for Indians living abroad. Remittances from gulf nations might see a sharp decline. According to data from the World Bank, the gulf nations – particularly, the UAE, Saudi Arabia, Kuwait, Qatar and Oman – were the top drivers of remittances to India that in total amounted to $80 billion in 2018.

Foreseeing future uncertainties in global oil markets, the government would find it in its interest to reduce its dependence on big suppliers in the gulf region and import more natural gas from Australia, United States, and even some gas-endowed African countries like Mozambique. In 2011, the IEA published a report exploring the potential of liquefied natural gas (LNG) as a cleaner replacement to other fossil fuels and cited its viability “for regions, such as China, India and the Middle East, which are urbanizing and seeking to satisfy rapid growth in energy demand.”

Although the “golden age of LNG” might not materialize by 2035 because of advancements in the renewables sector, natural gas will still likely play a pivotal role in the global energy transition spectrum. India’s import of LNG increased by roughly 7 percent year-on-year during the period from April to December 2019, due to an increase in domestic consumption and demand. In the wake of the government’s target to more than double the share of gas in India’s total energy basket from 6.2 percent to 15 percent by 2030, the country is investing $60 billion in gas infrastructure. According to Oil Minister Pradhan, by the end of Modi’s current term in 2024, India will be ready with a cross-country natural gas grid connecting gas-starved regions to supply hubs.

While the global economy is expected to contract by 3 percent in 2020, the International Monetary Fund has projected a 1.9 percent growth for India’s GDP in fiscal year 2021 in its revised World Economic Outlook. Although this is lower than the ‘Hindu rate of growth’ of the pre-liberalization era – averaging around 3.5 percent – the updated forecast presents a silver lining for India. India is now projected to be the fastest growing major economy this year. With the right mix of public health efforts, foreign policy outreach, and targeted fiscal policies, India stands a chance to emerge with an enhanced economic and geopolitical profile in the post-COVID world.

Bhumika Sharma is a final year student at the University of Delhi, India. She is interested in international business, regulatory affairs, geopolitics, and foreign policy. She has gained research experience through her internships with legislators, risk consulting firms and think-tanks such as Brookings India.