Cut oil demand, hedge imports: A practical path to India's energy security

India's oil imports (in volume terms) have, in fact, been decelerating. Against an annual average growth rate of 10.8% during 2005-06 to 2009-10, crude oil imports grew 1.9% during 2020-21 to 2024-25

The recent oil price shock is yet another reminder of the urgent need to curtail dependence on imported oil and to adopt measures that shield the economy from its severe and far-reaching consequences. Elevated oil prices constitute a supply shock, pushing economic growth and inflation in opposite directions. This erodes corporate earnings and causes portfolio outflows precisely when a widening current account deficit requires larger inflows, thereby adding pressure on the exchange rate. The top priority, therefore, must be to reduce oil consumption.

 

India’s oil imports (in volume terms) have, in fact, been decelerating. Against an annual average growth rate of 10.8 per cent during 2005-06 to 2009-10, crude oil imports grew by 1.9 per cent during 2020-21 to 2024-25. Net oil imports, which rose at an annual average rate of 8.3 per cent during 2005-06 to 2009-10, slowed to 2.6 per cent during 2020-21 to 2024-25. India’s oil intensity has also been declining, reflecting efforts to diversify its energy mix and reduce dependence on oil by switching to electric vehicles (EVs) and cleaner fuels. The government has also been pushing for increased use of biofuels. As a percentage of gross domestic product (GDP), India’s net oil imports declined from 4.4 per cent during 2005-10 to 3.0 per cent during 2020-25.

 

It is estimated that India’s net oil imports will moderate from 2.9 per cent of GDP in 2024-25 to 1.9 per cent in 2029-30, and further to 1.0 per cent by 2039-40. Yet in absolute terms, net oil imports are set to rise — from 229 million metric tonnes (MMT) in 2024-25 to an estimated 340 MMT by 2039-40 — as the economy expands. Thus, while the oil import burden relative to GDP will decline, India’s physical dependence on oil will continue to rise over the next 15 years. This underscores the need for durable, strategic solutions to energy security.

 

First, it is imperative to reduce oil demand drastically and hence dependence on imports. The pace of transition in the transport sector, which is a major user of oil, remains rather slow. Both the EV adoption rate and its current pattern in India have been disappointing. In 2024, the share of EVs was only 8.8 per cent of all road transport vehicles, the bulk of which was constituted by two-wheelers (6.1 per cent), followed by three-wheelers (2.1 per cent) and passenger cars (0.4 per cent). In contrast, the share of EVs in road transport vehicles in China was 40 per cent, with passenger cars accounting for 24 per cent and two- and three-wheelers 16 per cent.

 

The key point is that EV adoption in India has so far been concentrated in less challenging segments, with even passenger cars accounting for only a small share. A major reason is inadequate charging infrastructure for inter-city passenger cars and heavy-duty commercial vehicles, such as buses and trucks. Against the global norm of one public charging station for every 6 to 20 EVs, India has one for every 135 EVs. To accelerate EV adoption and shift the mix towards passenger cars and heavy-duty commercial vehicles, it is crucial to roll out  medium- and fast-charging infrastructure at suitable locations.

 

There are other sectors, such as agriculture and industrial heating, where oil use can be reduced, but this will be a slow process. In any case, India’s expanding economy means that total oil demand will keep rising unless reductions in oil use due to efficiency gains and substitution outpace new demand, leading to an absolute decline.

 

Second, to shield the economy and consumers from sudden oil shocks, India must actively explore hedging in international derivatives markets to lock in prices ahead of future spikes. Oil marketing companies now hedge refining margins, and the government uses annual term contracts for supply security, but a more comprehensive sovereign approach is needed. In this context, it is worth examining Mexico’s centralised hedging programme, the world’s largest sovereign oil derivatives scheme.  Since 2001, Mexico has been buying put options every year to set a floor price for its oil export revenues, thereby protecting the federal budget from a price collapse. As a large importer, India faces the opposite exposure and could consider buying call options to set a ceiling on future import costs, thereby insulating the economy when prices are expected to spike.

 

Any protection against future shocks, including hedging, entails costs in terms of premia and can be politically contentious if prices fall sharply thereafter. Yet hedging acts as insurance against extreme price movements, with the primary objective being to cap upside risk. The cost of hedging could be recovered through retail prices. 

 

In sum, oil shocks have recurred since the early 1970s, though at varying frequency. This recurring volatility exposes India’s economy to multiple vulnerabilities, given its heavy dependence on imports. It is, therefore, important to accelerate efforts to reduce oil use — the most durable way to cut import dependence and advance climate goals through the energy transition. However, as India’s reliance on imports will remain substantial for the foreseeable future, exploring a long-term hedging strategy is critical to reduce vulnerability.

The author is senior fellow, Centre for Social and Economic Progress, New Delhi. The views are personal