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.