Undiplomatic wrangling

India-Saudi relationship must survive oil price dispute

A long brewing disagreement between India and Saudi Arabia over the price of crude oil has spilled out into the open in recent weeks. In February, Saudi Arabia fell out of the top four sources for crude oil imports, with 1.8 million metric tonnes of oil being brought into India from the kingdom. That means Iraq, the United Arab Emirates, the United States, and Nigeria sent more oil to India in February than Saudi Arabia did. More broadly, it has been reported that the Indian state-controlled refinery companies will cut imports from Saudi Arabia by more than a third in May. While normally the refiners buy almost 15 million barrels of crude oil a month from Saudi Arabia, they are due to lift only 9.5 million barrels in May. India had already complained about output cuts from the Organization of Petroleum Exporting Countries, or OPEC, which were meant to drive crude oil prices up to a level that the cartel’s member countries thought would be sustainable for their economies. Saudi Arabia had in fact planned even deeper unilateral cuts.

However, even though the kingdom, in OPEC’s meeting last week, argued for gradually easing these cuts, India is going ahead with its attempt to diversify its sources of oil away from its heavy dependence on the Gulf countries. The longer dispute between OPEC — and in particular Saudi Arabia, the cartel’s unofficial leader — and India goes back to the supposed “Asian premium”, the notion that Asian countries such as India, China, Japan, and South Korea pay more for a barrel of oil than countries in Europe or North America. India’s petroleum minister has raised this issue with OPEC countries for six years now, and has claimed that the premium amounts to $2 or $3 more per barrel. Academic research on the subject does not support such a wide gap, but it is likely that in most years — for reasons to do not just with geopolitics but also to manage competition — the cartel provides a marginal discount to North American and some European consumers.

The Indian authorities were reportedly angered when the Saudi Arabian state oil company, Saudi Aramco, raised its Asian price for crude oil recently while reducing it for the other markets. The problem for India is that if it intends to take on the OPEC cartel, it needs to establish a more united front with other big Asian importers, including China and Japan. Some efforts in that direction have indeed been made. But clearly there is insufficient unity among the big Asian buyers to intimidate OPEC at this stage.

The Indian government, faced with grumblings about high petrol and diesel prices for consumers, and being dependent upon fuel taxes to finance its yawning deficit, may naturally feel that it should leverage its status as a large and growing importer to get the best price possible. Even so, it is far from clear that the current diplomatic spat is the best way to handle another country. Foreign policy should not be made by the petroleum ministry. For reasons as distinct as managing Pakistan, counter-terrorism cooperation, and foreign direct investment flows, Saudi Arabia is a very important partner for India. It is also the home of a large diaspora of Indian workers, whose employment there provides India with much-needed remittances. The broader India-Saudi Arabia relationship should not be allowed to suffer through undiplomatic wrangling over prices.