Prepare for the impending oil shock: decline in domestic crude production, need to work towards self-sufficiency in oil and gas

At first glance, global oil prices near $100 a barrel appear much higher than the supply/demand imbalances warrant.

With international oil prices reaching $100 a barrel and expected to remain high and volatile in the near term – thanks to geopolitical tensions resulting from the massive build-up of the Russian military on Ukraine’s borders – their impact is severe for a country like India, which imports 85% of its needs. For India, more expensive oil means a higher import bill and higher inflation. Indications are that the crude import bill for this fiscal year is expected to significantly exceed last year’s level of 196.5 million metric tonnes (MMT), worth $62.2 billion. In April-December of this fiscal year, India imported 156.4 million tons of oil worth $82.4 billion compared to 143.4 million tons of oil worth $39.6 billion from April through December for FY21, according to the Petroleum Planning and Analysis Cell.

Typically, every $10 a barrel increase in world oil prices increases the current account deficit — which is India’s broadest measure of goods and services transactions — by $9 billion to $10 billion. With oil prices currently much higher, the deficit could exceed forecasts of $40-45 billion, or 1.4% of GDP, for FY22, signaling the vulnerability of India’s external accounts.

At first glance, global oil prices near $100 a barrel appear much higher than the supply/demand imbalances warrant. Global oil demand in the first quarter of this calendar year is pegged at 99.7 million barrels per day, while global supply is roughly similar at 99.59 million barrels per day according to Energy. United States Information Administration (EIA).

Prices have soared due to the so-called “fear premium” or nervousness over disruptions in oil and gas supplies if Russia invades Ukraine. Not so long ago, there was unrest in West Asia, with drone strikes near oil installations in the United Arab Emirates causing oil prices to spike. That said, prices have been rising since mid-2020 due to drawdowns on global oil inventories which averaged 1.8 million barrels per day from the third quarter of 2020 through the end of 2021. But there are cautious grounds for optimism about increased supply. the market to meet demand in the remaining quarters of 2022 and cool prices. Higher US production is likely and more Iranian oil could enter the market with a satisfactory conclusion to the ongoing nuclear talks. Brent prices could drop to $87 a barrel in 2022 and $75 a barrel in the fourth quarter, according to the EIA.

High international oil prices are certainly not good news for India. There may not be an immediate impact on higher domestic retail prices due to the ongoing legislative elections. But the relief is only short-lived as higher retail prices are inevitable and are sure to trigger the need for greater conservation and efficiency in the use of oil and gas. To reduce vulnerability to high and volatile world prices, determined efforts must be made to increase levels of relative self-sufficiency by increasing domestic oil and gas production. Unfortunately, it is not the case. Domestic crude production steadily declined from 38.1 MMT in FY12 to 30.5 MMT in FY21.

Through December of this fiscal year, production at 22.4 MMT is somewhat lower than production in fiscal year 2021. Domestic oil producers must be incentivized to produce more to reduce import dependency over the medium term. India, for its part, is currently increasing its spending on seismic surveys of domestic hydrocarbon assets. The oil ministry is also reportedly considering ways to bring oil and gas from India’s 52 fields overseas to 22 countries. There is no alternative to scaling up local oil and gas production to reduce vulnerability to oil shocks and promote greater energy security.

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