American oil supplies okay, but India must not ignore traditional partners

Will US crude oil supplies mean India’s liberation from the OPEC? No. Not now, not in foreseeable future.

 |  5-minute read |   13-10-2017
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While having very close strategic ties with the United States is indeed profitable for India given the China factor, India cannot ignore the bigger strategic picture and should not be a rubber stamp for the Americans – all in the name of counter-balancing China. New Delhi must do a cost-benefit audit before it jumps on to the American bandwagon.

In its quest to diversify India’s oil imports basket with the help of a new friend (Read USA), India must not forget its tried, tested and trusted friends within Organization of Petroleum Exporting Countries (OPEC), such as Saudi Arabia, Iran and the United Arab Emirates (UAE), and non-OPEC traditional strategic friends such as Russia. All these are of extreme strategic importance for India and will continue to be so for years and decades.

Oil is going to remain a prized commodity for the next three or four decades. Projections by international oil experts are that oil will cease to be a strategic asset only around 2060. This doesn’t mean there would be no oil beyond 2060. The projections are only about Oil Age.

Oil would continue to be there even after the Oil Age, just as stones continue to be around after the Stone Age. The core of the argument is that the world would have evolved and gone beyond oil after 2060, as newer technologies would have come into place.

But for the next three to four decades, no country can afford to let its oil calculus go wrong. And this would inherently mean executing oil diplomacy correctly and sagaciously.

India must understand that American oil diplomacy’s single point objective is to deal with three mega oil powers of today – Saudi Arabia, Iran and Russia – and pump them out of business. In the process, the Trump administration is taking on its ally Saudi Arabia and Iran. Incidentally, Riyadh and Tehran are sworn enemies. Why should India be a pawn in America’s strategic games? The US anyway doesn’t have the heft to liberate India from oil imports from OPEC, despite its recently found shale oil fortune.

Shale oil is far more expensive to extract. Besides, the necessary environmental certifications required for the extraction make it even more costly and subject to tighter controls than normal crude oil. Because of this, the extraction of shale oil is economically viable only if international crude oil prices remain low and, under no circumstances, breach the $60-a-barrel mark. This has been the case for the past three years, and that’s why the US can afford to export oil, as in this case to India. But this scenario is unlikely to hold very long.

Within the next six months or so, international oil prices are likely to witness a spurt. A firm indication of this comes from the first-ever state visit of the Saudi King to Russia last week, during which Riyadh (along with other OPEC countries) and Moscow have agreed to cut oil production around March 2018. This would inevitably mean a spike in international oil prices after March 2018.

During the state visit of the Saudi King to Russia recently, Moscow and Riyadh decided to cut oil production by March 2018. Photo: ReutersDuring the state visit of the Saudi King to Russia recently, Moscow and Riyadh decided to cut oil production by March 2018. Photo: Reuters

The Narendra Modi government will commit a monumental blunder if it were to think that the US crude oil supplies to India, which began last week, are going to be a panacea for its hugely expensive oil imports for which New Delhi has traditionally been dependent on the oil-rich Middle East. Moreover, its independent foreign policy will go for a toss if New Delhi were to think so.

The Modi government has already infuriated Iran to ingratiate itself with the US. 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 from next year, particularly in 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 US oil exports would dwindle.

India may already have sown the seeds for a rude awakening and jeopardised its relationship with two trusted partners in the Middle East by pursuing American interests, rather than its own. Brinksmanship has its own pitfalls.

This warning from international oil trade analyst Himendra Kumar is worth considering. Kumar observes thus: “The world is currently passing through a recession. But history has shown us that recessions are only cyclical. When the tide turns and the US domestic oil demand gathers momentum, the US may not be left with much oil to export. Besides, the oil grade the US chose to export to India, is primarily the one used by its own refiners. This variety of crude gives better yields and refining margins. Also, given the limited quantity of commercially-recoverable shale oil, 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.”

Also read: Credit for letting women travel alone for haj goes to Saudi Arabia, not India


Rajeev Sharma Rajeev Sharma @kishkindha

The writer is an independent journalist and a strategic analyst.

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