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November 2017 Edition of Power Politics is updated.  Happy Diwali to all our subscribers and Distributors       November 2017 Edition of Power Politics is updated.   Happy Diwali to all our subscribers and Distributors       
Issue:Sep' 2017


Need for caution in turbulent market

Rajeev Sharma

What are the s t r a t e g i c implications of the United States beginning crude oil sales to India? Well, aplenty. Here's a quick run-through of this extremely important strategic issue about which, unfortunately, not much is known. Read on.
India received its first shipment from the U.S. of 1.69 million barrels recently and its current order book is of the size of one million tons, which would arrive in due course. Now consider the following strategic inputs. The US wants to distort India's crude oil supplies from Iran and to an extent, from Saudi Arabia. The Trump Administration wants to isolate Iran as it views the Islamic state as an axis of evil and wants to cut its access to the US dollar to the farthest extent possible. The crude oil trade is in US dollars.
Similarly, the US wants to exert further pressure on Saudi Arabia by making a concerted attempt to keep international oil prices well below $60 a barrel so that its budgetary deficit widens to unmanageable proportions.
Currently, Saudi Arabia is dipping into its rich but fast-depleting Sovereign Wealth Fund to meet its budgetary shortfall, but they are widely expected to exhaust this contingency fund within the next three years as at current spending levels, their budget deficit is bound to spiral out of control. The Saudis need oil well above $80 a barrel to balance their budget. At some vulnerable point for Saudi Arabia, the Americans would make an overt move to take control of Saudi Aramco.

For India, theoretically, the addition of the US as a crude supplier, widens the pool of suppliers and gives a filip to its energy security. However, it comes at the cost of a big and time-tested supplier turning hostile towards India.
At American behest, India has significantly trimmed its oil supplies from Iran in recent months, which resulted in Iran withdrawing some of the concessions to Indian refiners. India imported 214 million tons of crude oil in 2016-2017 fiscal year, a jump of 5.4 per cent from a year earlier.
The oil the US has chosen to export to India is of the sour variety, not the expensive shale oil. That's all very well, given that the Indian refineries are configured to process the Middle East sour oil grades. The US has turned a net exporter of crude oil and the commodity's largest producer in the world on the back of a shale oil revolution made possible by the pioneering horizontal drilling and hydraulic fracturing technology, popularly known as fracking. Although the US has significantly cut down its oil imports from the Middle East, it still needs to import significantly high quantities of crude oil to meet its burgeoning needs. The US currently produces about 9.3 million barrels of oil per day, while its domestic consumption for oil and oil equivalent cumulatively is more than 19.5 million barrels per day. Noted international oil trade analyst Himendra Kumar has the following remark to make in this context: "The world is currently passing through a recession. But history has shown us that recessions are only cyclical. When the tide turns and the U.S. domestic oil demand gathers momentum, the U.S. may not be left with much oil to export.
Besides, the oil grade the U.S. chose to export to India, is primarily the one used by its own refiners. This variety of crude gives better yields and refining margins. Shale oil is commercially viable only at prices above $50 a barrel. Also, given the limited quantity of commercially-recoverable shale, it can be deployed only to put a lid on spiraling global oil prices and cannot overtake supplies from conventional sources. It's only a tool to balance the global oil market, no more."
The Narendra Modi government has infuriated Iran to ingratiate itself to the Trump Administration. It may well turn out to be a costly mistake for India as the Chinese, Japanese and the South Korean oil demands are all set to pick up around 2019-2020. When that happens, the current surplus in the global oil market would evaporate quickly, OPEC and Middle East suppliers would get back the control over the turbulent oil market and the U.S. oil exports would dwindle.
India may already have sown the seeds for a rude awakening and jeopardized its relationship with two trusted partners in the Middle East by pursuing American interests, rather than its own. India should be ready to pay a price for brinkmanship if it doesn't play its cards smartly enough.