Rattling sabres at Saudi Arabia was unwise

With India’s oil import dependency at 85%, we are not in a strong position to throw our weight around.

By Bhamy V Shenoy

It is ironical that even as prime minister Narendra Modi has been strengthening personal relations with crown prince of Saudi Arabia, Mohammed bin Salman (MBS), India’s oil minister, Dharmendra Pradhan is sabre-rattling by using India’s oil purchase as a “weapon”.

Either India’s oil ministry does not want to learn from the world oil history, or truly believes that India can dictate terms to force the Organization of the Petroleum Exporting Countries (OPEC) to adapt oil production policy to meet its needs of lower oil price by increasing oil production. This is a perfect example of the tail trying to wag the dog.

Though OPEC was formed as early as 1960 to control oil pricing, it was only after the first oil shock of 1973 that it was able to exercise its power. When the oil price went up by 400% to precipitate economic crisis, OECD formed the International Energy Agency (IEA) as a countervailing force and build strategic oil reserves.

None of the powerful OECD countries threatened OPEC individually. But, through IEA, they sent a powerful message. IEA countries managed to reduce oil demand, and OPEC learnt the lesson. Though oil demand is inelastic in the short term, in the medium and long term, this is not the case.

Late Sheik Yamani, who had served as the Saudi oil minister, had famously said that the Stone Age did not come to an end because our planet ran out of stones. OPEC+ is fully aware of the need to prevent the oil price from going beyond a tipping point. But, no one knows what that is.

Beginning of April, OPEC+ decided to increase their oil production by 2 million barrels per day (mmbd) gradually over three months starting from May. Soon after that announcement, oil prices declined, though not precipitately. I wonder why our oil minister did not claim that India played some role, to get political capital.

In reality, two factors might have influenced the OPEC+ decision. First, the internal dynamics among OPEC+ members to secure higher market-share. Mostly, Russia and the UAE have been putting pressure on the OPEC+ to relax quota for some time.

Second is the possibility of oil demand going up by more than 2 mmbd in the second half the year. With the spread of the Covid-19 vaccination programme in different parts of the world, there is much optimism on the part of oil pundits over oil prices reaching $80 per barrel in the third quarter.

Even before the recent oil price strengthening, oil minister Pradhan had been commenting that India could use its considerable oil purchases as a “weapon”—since at least 2015. Finally, this year, he started to use this weapon against Saudi Arabia. Recently, he has instructed the public sector oil companies to reduce imports from Saudis.

He could have been more diplomatic and played his cards without revealing them since his chances of winning were not high. It looks as though he wanted to get political capital by showing that he is prepared to dictate to the Saudis, the de facto leader of the OPEC and also of Islamic countries.

With India’s oil import dependency at 85%, we are not in a strong position to throw our weight around. It is true that, at the current rate of import—of about 5 million barrels per day—India is the third-largest oil importer after China and the US. In a few more years, India may become the second-largest.

Currently, it is a buyer’s market with more than 6-7 million barrels per day surplus crude oil production capacity. As the world is going through a much-needed energy transition to reduce dependence on fossil fuels, the historical power of OPEC will diminish. This might have given a false sense of power to the oil minister to urge Saudis not to reduce oil production and allow market forces to set the prices.

One can even call such an act “childish.” For most countries in the OPEC, oil price can make or break the economy of their countries and even destabilise their governments. For India, higher oil prices are certainly a big problem, but manageable with some difficulty. Given this reality, India should not have made such a threat publicly.

In 2019, during his visit to India, MBS had announced Saudi Arabia’s interest in investig $100 billion or more in India. Saudi Aramco is considering buying 20% stake in Reliance Industries’ oil and chemical business. It is a joint venture partner in a proposed 1.2 mmbd refinery along with public sector oil companies on the western coast of India.

The minister, without making much noise in the media, could have quietly asked Indian oil companies to start increasing their spot purchase from any country which offers better terms. Already, India is importing from several countries and its dependence on the Saudis is below 10%.

Also, India could have tried to form a group of major oil importers to put pressure on OPEC+ not to allow prices to go high or to give discounts to developing countries like India in a diplomatic way.

Often, it is the speculators of future trading platforms who contribute to crude oil price volatility. Such a price volatility helps neither the oil exporters nor the oil importers. Both the oil importing and exporting nations should get together to replace the current highly damaging and unproductive futures market to “discover” oil prices.

Economists who belong to the fundamentalist school are unlikely to support such a stand. Their argument is that futures market will ‘discover’ price most efficiently.

Two recent examples show how wrong they were. Last year, the crude oil seller was ready to pay as much as $40 per barrel to the purchaser because of the irrational behaviour of the futures market. When crude oil price increased to a historic high of $147/barrel in 2008, what purpose did it serve? It is high time that we get rid of the futures market. It is here that India should take a lead, rather than fighting with Saudi Arabia.

Since there is too much at stake for both the countries, the Saudis have already taken a first step in not cutting allocation of crude oil for April to India. Let us hope that the Indian oil ministry will reciprocate the gesture and work towards a better relationship with the Saudis.

The author is Former manager, Conoco, and former board member of the national oil company of Georgia Views are personal