India's oil imports from Russia, a Western pariah, are fully justified

Soon after the Ukraine invasion by Russia on February 24, a new Energy Cold War started. Now it has become a full blown Energy War. During the last 50 years there have been several Energy Wars of different kinds - some resulted in oil prices sky-rocketing and others in oil prices declining, or even collapsing.

For example, the first such Energy War was in 1973 after the Yom Kippur War when Arab Countries, led by Saudi Arabia, embargoed oil supplies. Later in 1986, when OPEC members started to violate production quota and Saudi Arabia was losing market share, it precipitated oil war against other oil members. Then oil prices collapsed.

In the current Energy War, it is the West led by the US that has started to impose oil sanctions on Russia. Surprisingly, Russia-Ukraine war does not seem to have any significant impact on oil price so far. Currently, international oil price after reaching a high of $129 per barrel has fallen below $110/b (on June 24). Some oil pundits were predicting, even before the Ukraine invasion, price to go above $120/b. A few days after the war started oil prices jumped. Then they fell. Because of the potential demand loss from the pandemic and the release of Strategic Petroleum Reserves by the West, prices have not shot up as expected. During the first two oil shocks of 1973 (Yom Kippur War) and 1978 and 1980 (Iranian revolution followed by Iran-Iraq war), the price went up by 400 per cent and 300 per cent respectively.

Oil price had been more than the current levels in 2008 when it reached $147/b. Still, economies all over the world are threatened by high oil price. And India is one of them. As a result, the NDA government was forced to reduce excise taxes to decrease petrol and diesel prices.

By any standard, Russian attack on Ukraine was unjustified and immoral. Every sovereign country has the freedom to choose whichever block it would like to join. And in this case, Ukraine has expressed its desire to join NATO; Russia cannot attack a sovereign country by giving the excuse that its security will be compromised. In 2008, Russia attacked South Ossetia and occupied it for the same reason. At that time the West’s response was not as aggressive as it is today.

Soon after the attack, the West started to impose different kinds of sanctions -- freezing bank accounts, banning exports of sensitive products, removing from the international financial messaging system Swift and so on -- against Russia to punish for its brutal attack. The latest round of sanction to be imposed end of May was to stop oil and gas imports. The West took almost 100 days after the attack to impose oil sanction -- time taken to ensure it has minimal collateral damage.

Since the US' import is insignificant, it was the first country to impose complete energy sanction (oil, gas and coal). It was followed by the UK. In the case of the UK full sanctions will come into force only by the end of 2022. For the rest of EU, only 90 per cent of oil imports will be stopped allowing a land locked country like Hungary to allow pipeline imports.

Dependence of European countries on Russia is 40 per cent for their gas requirements. There is no easy way to find alternate ways to replace such a large quantity. As a result, there is hardly any discussion to impose gas sanction. In fact, it is Russia which is ever ready to threaten with gas embargo. Soon after Finland expressed a desire to join NATO, it has stopped gas exports.

As can be surmised, West has been selective in imposing oil and gas sanctions against Russia. EU has excluded France carrying out business with Russia in nuclear power sector. France meets 70 per cent of its power requirements from nuclear power. However, when India started to increase oil imports and it reached around 800000 BD in May, West led by the US started to express resentment. Is this hypocrisy or arrogance on the part of the West?

India was able to get a generous discount for Russian crude oil. It amounted to as much as $40/b and Indian refineries are well equipped to handle Russian crude oil. There are even loud rumours of Western countries imposing secondary sanctions on the spurious claim that India is indirectly exporting Russian oil in the form of petroleum products. Even before the war, India exported petroleum products. Thus, the attempt to punish India by the West is totally unjustified and can even be considered hypocritical.

India’s foreign minister S Jaishankar had no problem in defending India’s position in Bratislava global conference. He was asked how India could justify funding Russian war efforts by buying oil. He responded by asking how Europe can justify the funding by continuing to buy Russian gas.

As the energy war unravels, it is difficult to predict what will happen. Will prices sky rocket as happened during earlier oil wars? There is not enough spare production capacity to replace potential loss of Russian oil. It may not be possible for Russia to find market for its crude oil and products. In such a case oil prices could easily exceed $200/b.

On the other hand, fourth wave of the Pandemic may reduce oil demand. Or economy may go into recession as is reflected by the falling stock market. OPEC may relax their quota and add to supplies. West may release some more strategic petroleum reserves. If all these or some of these events take place price may fall. Probability of this scenario taking place is smaller than the one of higher price. However, Citigroup’s global head of commodity research was continuing to predict price falling to $70/b based on recession.

Irrespective of which scenario may take place, India should have the flexibility to import the lowest cost oil and not join the West in stopping imports from Russia. For the long term, we should always remind ourselves how some of our Middle East friends have threatened India during our wars with Pakistan and there is a strong strategic reason to strive for maximum flexibility in securing oil.

(The writer is a former international oil and gas industry professional)