The sun is seen behind a crude oil pump jack.
Credit: Reuters Photo
World oil prices are hardening and the outlook for the rest of the year is ominous. The decision by Saudi Arabia and Russia earlier this month to extend voluntary production cuts for another three months has caused prices to spike to their highest level since November. This does not portend well for India as it relies on imports to meet over 85 per cent of its crude oil needs. Currently, the benchmark Brent crude is nearing $95 per barrel, while the West Texas Intermediate crude from the United States, is around $91 per barrel. This is in sharp contrast to three months ago when prices were hovering in the range of $75-80.
It was then that Saudi Arabia, leader of the Organisation of Petroleum Exporting Countries (OPEC) Plus cartel announced this production cut which came into effect in July. It had come on the back of an earlier output cut of 1.15 million barrels per day for the entire group in April. Russia, as a member of OPEC+, has extended its reduction of 300,000 barrels per day for the next three months, right up to December.
The contraction in supply combined with other developments like improved demand from China, have created the current price spiral. Though the economic outlook for the world’s largest oil importer is not yet robust, demand has picked up, reports say, due to a rise in industrial output and higher consumer spending.
Global North’s woes
The spike in oil prices is not just a problem of emerging economies such as India which will be forced to shell out more foreign exchange resources to meet their energy needs. The issue also looms large before the Global North. Developed countries in Europe and the US which had been facing the brunt of soaring energy prices and inflation ever since the onset of the Ukraine conflict could once again face a crisis.
The unprecedented inflation caused by high energy costs over the past year-and-a-half, threatens to recur in case crude oil prices fail to cool down soon. These pressures had been the driver for aggressive rate hikes by central bank but the softening of oil prices since December had brought some relief.
In fact, the US Federal Reserve has indicated its intent to pause the current rate hike cycle recently. This followed moderation in US inflation to 3 per cent in June. It has since accelerated to 3.2 per cent in July, and 3.7 per cent in August. The rising trend is being pushed by higher energy costs. If oil prices continue to surge, the US Fed may have to call off its plans to halt rate hikes. In addition, the Joe Biden administration is worried over rising gasoline prices as a big chunk of its Strategic Petroleum Reserve (SPR) was released last year to stabilise prices. This gives it little leeway to act in the current scenario.
European countries will also be hit hard by the continuing firming up of oil prices. Inflation had tamed to some extent in recent months with the Eurozone recording 5.3 per cent rise in August. But the hardening of oil markets will recreate last year’s scenario of high energy costs.
Gloomy outlook
As for India, if the current trend continues in world oil markets, it could face an expanding fuel import bill. What is interesting, however, is that any special discount for developing economies has been ruled out by OPEC+ in the past and there has been no indication that this issue was discussed with Saudi Arabia recently. This is despite improved bilateral ties and the recent official visit of Crown Prince Muhammed bin Salman. Though Riyadh declared its intent to make sizable investments here, there has been no change in its stance towards pushing oil prices higher. The leader of OPEC+ is clearly adamant about ensuring that prices remain above $85 per barrel.
In the case of discounted oil purchases from Russia, these are no longer much different from market rates. India will, therefore, find it difficult to keep its oil import bill at manageable levels in 2023-24. The price of the Indian basket of crudes has already shot up to $95.46 per barrel.
The outlook is gloomy in view of forecasts by at least two major banks, Goldman Sachs, and Citibank, that oil prices will touch $100 per barrel by the end of 2024. In this backdrop, India will have to keep the focus on new and renewable energy sources to reduce its reliance on hydrocarbons from abroad. The results of this drive are likely to fructify only in the long term. For the time being, India has no option but to spend more on oil imports to ensure that its strategic energy needs are fully met in the short and medium term.
(Sushma Ramachandran is a senior journalist.)
Disclaimer: The views expressed here are the author's and do not necessarily reflect the views of DH.