Business India ×

Published on: March 23, 2021, 5:33 p.m.
Soaring oil prices: Blame it on Saudis!
  • State refiners import an average 14.7-14.8 million barrels of Saudi oil in a month

By Rakesh Joshi. Executive Editor, Business India

As the world’s third-biggest oil importer and consumer, India imports more than 80 per cent of its oil needs and relies heavily on the Middle East. The Organization of Petroleum Exporting Countries (7) and its allies, known as OPEC+, have been traditional suppliers to India. But the supply curbs imposed by these countries have resulted in a spike in global crude oil prices, which has hurt India. India is particularly vulnerable, as any increase in global prices can affect its import bill, stoke inflation and increase its trade deficit. Transportation fuel prices in India are at a record high.

Instead of cutting excise duties on petrol and diesel to cushion the impact on the common man, New Delhi has been appealing to the OPEC and OPEC+ countries to ease the supply curbs, but to no avail. India is now getting tough: state refiners are planning to cut oil imports from Saudi Arabia by about a quarter in May, in what is being seen as a tit-for-tat.

The gainer would be the US which, in February, emerged as the second biggest supplier to India after Iraq. Saudi Arabia, which has consistently been one of India’s top two suppliers, has already slipped to No. 4 for the first time since at least January 2006. The February imports from Saudi Arabia fell by 42 per cent from the previous month to a decade-low of 445,200 bpd, says trade data. Iraq continued to be the top oil seller to India, despite a 23 per cent decline in purchases to a five-month low of 867,500 bpd, the data showed.

As part of India’s energy security strategy, India has been diversifying its energy basket with crude oil supplies from non-OPEC sources, which has seen it increase oil imports from the US. India is also turning to Russia, its old energy partner by the first-term contract, for crude oil sourcing. Indian Oil Corp. (IOC) and Rosneft inked the agreement for 2 million tonnes (mt) of Urals grade crude in February. The two countries are working on a multi-pronged approach that involves energy sourcing and supplies, upstream investments in Russia and India, and joint collaboration in petrochemicals.

Blame game

The stand-off with Riyadh follows OPEC’s decision to ignore calls from New Delhi to help the global economy with higher supply. However, it remains to be seen how it will impact the geopolitics of the region, given the success of Indian diplomacy under Prime Minister Narendra Modi to win over the support of key Arab states in the tussle with Pakistan.

Recently, Oil Minister Dharmendra Pradhan blamed Saudi’s voluntary cuts as the reason for the spike in global oil prices. However, OPEC and its allies ignored India’s plea to ease production control, with Riyadh telling New Delhi to use oil it bought at rock-bottom rates last year to fill up its strategic reserves at Visakhapatnam in Andhra Pradesh, and Mangaluru and Padur in Karnataka to lower retail prices. The average cost of the crude purchased then for the reserves was $19 a barrel. In fact, Saudi Energy Minister Prince Abdulaziz bin Salman had openly taunted India, saying it should use some of the 16.71 million barrels of crude out of the strategic storage which it had created with oil purchased at ‘cheaply’.

Following the stand-off, Indian state refiners are speeding up their diversification of crude sources to reduce reliance on the Middle East. The results would be evident in May, when Indian Oil Corp, Bharat Petroleum Corp, Hindustan Petroleum Corp and Mangalore Refinery & Petrochemicals lift about 10.8 million barrels. State refiners, which control about 60 per cent of India’s 5 million barrels per day (bpd) refining capacity, together, import an average 14.7-14.8 million barrels of Saudi oil in a month. IOC and MRPL have also issued tenders seeking oil for delivery in May.

The irony of the situation is that India had supported the decision of OPEC and its allies to cut production last year in view of the oil demand collapsing due to the spread of Covid-19. Pradhan, who was recently questioned on this, said that, at that point in time, the producers, especially OPEC, had assured the global market that, by the beginning of the 2021, demand will be coming back and production will be as usual. However, production is yet to be normal. “If you do not supply properly, if the gap in demand and supply is artificially (created), there is a price rise.”

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