Research Articles

India’s Oil Import Diversification By Sakshi Oza

Ever since the discovery of Energy resources, Oil has dominated the market. In terms of global rankings, after the United States and China, India is the world’s third largest oil consumer and the third-largest crude oil importer. Having little luck with its offshore oil fields, India is highly reliant on Saudi Arabia to provide crude oil to meet domestic demand. Following the Covid 19 pandemic, reductions in oil supply by OPEC and OPEC+ had led India to diversify its oil imports to attain a stable and incessant supply. Furthermore, India has begun to reduce its oil import dependency from Saudi Arabia and increase its oil imports from countries such as United States of America, Nigeria, Guyana, Brazil and Norway.

The second-largest crude oil importer in South Asia, India’s supply is dominated by west Asian countries who are members of the OPEC+ group. With US sanctions on Iran, India has been purchasing crude oil from 3 major suppliers namely Saudi Arabia, Iraq, and UAE for a decade. With the majority of supply coming from one region, there are several hazards and insecurities involved. A volatile political atmosphere and unstable economy are one such. The oil crises of 1973 and 1979 have taught the globe that highly depending on a single source, will make oil-importing countries vulnerable to supply shortages. To avoid such disasters, several countries have diversified their oil import policy. For India, there have been discussions among the policymaker in the past to diversify the imports but no action had been implemented on ground. As the saying goes “better late than never”, in March 2021 India took a major decision to diversify its oil imports and cut its dependency on West Asia. This move was triggered by a sharp drop in the crude oil production and supply shortages by OPEC+ countries.

During March-April 2020, with the Covid-19 pandemic being on the peak, quarantines and lockdowns were implemented across the globe, people were confined to the four walls of their houses and opted to travel in private vehicles as opposed to public transports. All this had an adverse impact on the oil industry as oil prices crashed and went as low as 12.22 dollars per barrel (OPEC basket). Amidst these challenging times, India supported Saudi Arabia and bought a huge quantity, 16.71 million barrels of crude oil on the assurance that when the economic conditions get better, Saudi Arabia and the other OPEC+ members will allow India time to recover its economy. This was not just a verbal agreement. This was backed during the G-20 meeting in April 2020 which was represented by India and Saudi Arabia.  The meeting backed the decision of the biggest ever reduction in production supply of crude oil by OPEC+ in order to stabilize the global oil market. At the same meeting it was also decided that Saudi Arabia and OPEC+ members will not increase the crude oil prices significantly and will control the production cuts as well. Both parties reiterated the necessity and maintenance of a stable, affordable and reliable supply of crude oil, which will assist the economic recovery caused due to the Covid-19 pandemic. However, with the large-scale vaccination campaign, the global economy had started to recover soon. This in addition to the return of normal life in 2021, oil prices began to rise with a surge in demand curve. To ensure the market doesn’t collapse again in the future, the OPEC+ members decided to increase the production cuts instead of increasing the supply. With crude oil price at 65 dollars per barrel in March 2021, India contested the high reductions in production supply of crude oil by Saudi Arabia. This had no fruitful effect as Saudi Minister refused to increase the production supply and suggested India use crude oil which it bought last year in March at cheaper prices. In addition, Saudi Arabia voluntarily decided to cut an extra 1 million BPD in February and March throughout April further contributing to elevated crude oil prices. The petrol prices in India kept increasing and skyrocketed at 100 rupees per litre due to high prices and high consumption.

In response to Saudi’s refusal to increase production supply, India decided to go ahead and purchase Crude oil from different countries. The Indian government asked state-owned oil marketing companies to purchase oil from different destinations and cut its reliance on West Asia, Saudi Arabia in particular. India started cutting its oil imports from Saudi aggressively. Soon, USA replaced Saudi Arabia and became India’s 2nd biggest oil exporter whereas Saudi Arabia plunged to No. 4 for the first time in a decade.  The decision of state-owned refineries to buy 36% less crude oil from Saudi Arabia in May hit the news next. Amidst India’s decision to diversify its imports, Saudi Arabia augmented the cost of shipping by 20-25 cents per barrel, raising the total cost of crude oil for Importers in Asia to 1.8 dollars over the benchmark price.  Whereas the shipping price remained the same for northwestern European countries and America.

Impact:

Even though India has decided to cut its dependency on Saudi Arabia for its crude oil imports, it has not stopped importing crude oil altogether. It still continues to purchase crude oil from Saudi Arabia even though the quantity has decreased. For the longest period in history Saudi Arabia’s top priority was to manage and maintain diplomatic and commercial relations with Europe and the United States of America, but with India unleashing its “oil weapon”, Saudi Arabia will have to shift its focus towards sustaining diplomatic, political and economic relations with India. India’s diversification has proved to be a disappointment to Saudi’s global market share. If India successfully diversifies its imports without any consequences to the economy while maintaining its autonomous relationship with Saudi Arabia, it could lead as an example for more south Asian consumers who are dependent on West Asia, reshaping the geopolitics and trading routes.

In addition, India started to buy crude oil from new destinations including the United States, Norway, Brazil, and Guyana. In February, US crude oil imports rose to 48%, accounting for 14% of India’s total imports. Apart from already being strategic partners, the Crude oil trade has added new vitality to the India-US partnership. The entrance of Guyana into the Indian oil market is expected to take India-Guyana relations to newer heights. Both the countries already share historical and cultural ties. Recent Bilateral relations have also developed significantly: Oil trade will further strengthen collaboration between the two countries thus opening up various investment and trade opportunities.  Marking January 2021, India and Brazil entered into a Memorandum of Understanding (MoU) in cooperation of Oil and gas field. With India’s new oil relationship with Brazil, this MoU proposes to expand cooperation in oil and natural gas exploration and production, as well as promote cooperation in energy policies. As India continues to purchase crude oil from Norway’s John Sverdrup, the relationship between India and Norway is assumed to attain new frontiers.

 

CONCLUSION

India is working towards emerging as a global power and Saudi Arabia has its desire to remain the dominant player in the west Asian and OPEC+ region. To nurture these ambitious visions both countries will need each other’s cooperation to fuel their dreams. India’s oil diversification has not impacted the overall strategic relationship between both countries, as both the countries have a lot to gain from their partnership apart from just the crude oil trade. India needs Saudi Arabia’s foreign investments in the country and Saudi needs India’s continuous supply of various commodities including food items. India-Saudi relations still have a lot of potential in improving the defense and security sectors which if achieved can give a whole new meaning to their relationship. This can only be achieved if both sides continue to make efforts to keep the oil trade issue aside. The two governments can take several steps to further strengthen their partnership such as increase high-level official meetings to improve strategic and political relationships, India can declare and practice a de-hyphenated policy with Saudi Arabia; without the exchange of one commodity affecting the overall relationship, both countries can engage in mutually benefitted foreign investments, Indian   Defence Forces and Saudi Defence Forces should engage in joint military exercises and training of troops.

Given that India and Saudi Arabia have sustained and embraced a comprehensive relationship for decades, there are expectations that both countries will contribute towards global and regional peace and cooperation in the future and that will require prioritization of relationships by both countries.

By Sakshi Oza

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