Optimism for Gulf oil is premature: India must boost domestic output now

Weaponising trade chokepoints has fragmented global markets like crude oil, leading to sharp regional price variations

The oil-and-gas markets have responded with optimism to reports that the United States (US) administration has sent leaders in the Islamic Republic of Iran a 15-point agenda for ending the war in West Asia. The hopes sparked by this information have been enhanced by an apparent statement from the Iranian authorities that they will permit ships from “non-hostile” nations to go through the crucial Strait of Hormuz as long as they maintain contact with Iran and seek permission. While it is easy to understand the desire to see these as signs that the weeks-long crisis in the Gulf will end and the fossil-fuel markets return to normalcy, that might be too much to expect, given the mercurial natures of everyone involved in the US, Iran, and Israel. And, India should be prepared to pay higher than expected prices for imported energy in the foreseeable future. 

One of the more important consequences of the weaponisation of trade chokepoints has been that some markets that were earlier global in nature, such as those for crude oil, have seen sharp variations in regional prices. For India, for example, the price of oil from the Gulf is far more relevant than the price of oil from Texas or the North Sea. By some estimates, this may mean that for a significant part of the coming few months, the price of the Indian basket of crude oil might be almost double of what it was over the past several months. It should go without saying that, if this is the case, it will put tremendous stress on both household and government finances. 

The threat to India’s political economy caused by a sharp spike in the price of energy is a sadly familiar prospect. This has been the case before — in 2013, in 1999, and earlier. The only real weapon that New Delhi has against this is not something that can be deployed at short notice: Greater energy independence. However, the current government has had more than a decade to develop this weapon. Since it took office in 2014, it has been blessed with a longer-than-normal run of manageable energy prices. In this period, it has taken some steps towards self-reliance in energy — for example, the ambitious targets for renewable-power capacity. But, in current circumstances, renewables are not a sufficient replacement for fossil fuels, particularly when it comes to the base load for power, and they will not be for many years to come. There is thus no alternative to increasing domestic exploration, extraction, and processing of oil and gas. 

Unfortunately, on this crucial metric, the government has fallen short. In spite of some attempts at forward-looking changes to exploration policy, production has declined over 30 per cent since 2014. This is in spite of increasing domestic demand, which has risen alongside a growing economy. The introduction in 2016 of a new exploration and licensing policy did not substantively increase production or gain commercial interest. Production sharing was replaced with revenue sharing, but this meant that companies would see revenue a lot later in the project timeline, rendering them less interested. Data coverage for new open acreage remained too low, and price uncertainty persisted; Brazil, in comparison, has two or three times the level of exploration, thanks to investing in geological data. India clearly needs to work harder and learn from successes elsewhere. This crisis — or threat of crisis — should not be wasted but used as an opportunity to increase self-sufficiency.