Faster than any other commodity, crude oil and natural gas will factor in any major economic and political developments in their prices. In fact, this is the reason in the post deregulation of oil prices in the country we should be braced for periodic changes in the fuel cost. It is not that our politicians are not aware of this simple truth. But those in the opposition and some in the United Progressive Alliance (UPA) itself have made it a practice to register their protests whenever prices are hiked by oil marketing companies to placate their constituencies. In view of local oil refineries’ dependence on crude imports close to 85 per cent of their total requirements, there is no running away for us from being impacted in a major way by changes, at times rapid in the prices of two benchmark varieties of crude – Brent and West Texas Intermediate. For example, crude prices have now perked up on reports of China’s June manufacturing output growing at its fastest pace in nine months.
India has to keep its ear to the ground as the tightening of the US and European Union sanctions on oil imports from Iran over its nuclear programme have brought down the Islamic Republic’s oil production to a two decade low. Taking a cue from the US disciplinary move, South Korea stopped importing Iranian crude earlier this month. Supplies to China, Japan and India have fallen sharply because of a European ban on oil tankers carrying Iranian crude. The US earlier tightened measures that prohibit international banks from completing oil transactions with Iranian banks. The sanctions intended to break the Islamic Republic’s resolve to stick to its nuclear ambition have no doubt achieved a lot in terms of oil production squeeze and export denials. But the world, according to many, is yet to see the “full impact” of Western moves. Is there a suggestion in this about Iran suffering a major setback in earnings from oil exports could be up to some tricks over the Strait of Hormuz? Hasn’t Iran said it could suspend oil shipments through one of the world’s busiest oil routes?
Iran is aware that such a move will have the disapproval of at least the liberal group of the Organisation of the Petroleum Exporting Countries (Opec), which is pumping enough crude to compensate for production loss in the Islamic Republic. But in the unlikely event of Iranian sabre rattling finds its denouement in the Strait of Hormuz through which an estimated 17 million barrels per day (mbd) travel being closed then as a JP Morgan official says oil “price would quickly adjust to reflect the expected duration of disruption and potential for a mitigation release of OECD (Organisation for Economic Co-operation and Development) strategic reserves.” In the meantime, however, Saudi Arabia, the voice of reason in Opec and the United Arab Emirates have commissioned two new oil pipelines bypassing Hormuz. As a result, such pipeline capacity in the region goes up to 6.5 mbd. The question is to what extent the pipelines will mitigate oil price risk in case shipments through the Strait of Hormuz are suspended.
In the meantime, an International Energy Agency (IEA) report predicts a milestone development next year when oil demand in developing nations will be ahead of the developed world. On an assumption of muted global economic recovery, IEA anticipates a 1 mbd oil demand growth in 2013 to 90.9 mbd. While the rise in oil demand next year will be higher than in the past two years, it will “remain well below the pre-credit crunch trend.” There is an unstated caveat in IEA projection that the Euro zone crisis centring on sovereign debts will be contained.
The incremental demand in 2013 will be met by growth in non-Opec oil supply of 700,000 bd and 300,000 bd of natural gas liquids from Opec. Many believe that the trend to be set by the developing world using 45.7 mbd in the second quarter of 2013 thus overtaking daily oil use by member countries of OECD is unlikely to be reversed. This development is not, however, unexpected as growth is mostly happening in China, India, Russia and oil producing countries in the Middle East with the economies in the West faltering. Interestingly, prevalence of subsidy, a burden that many developing countries are now desperate to do away with has been responsible for rapid rise in oil use in China and India. The past decade and a half have also seen rapid building of energy-intensive industries like aluminium and copper and steel in China and India in a shift away from OECD countries. At the same time, high oil prices over a long period have boosted growth in the Middle East and Commonwealth of Independent States, which in turn is allowing citizens there to use more oil.
David Faye of IEA says: “Rise of non-OECD oil demand is a trend that has been under way for a long time.” In fact in crude refining, throughputs in the developing world sprinted ahead of OECD in 2010-end. Refinery margins particularly in OECD will come under pressure as the current year and the next will see accretion in distillation capacity by 2.3 mbd.