Securing India’s Oil Needs
From Current Affairs Notes for UPSC » Editorials & In-depths » This topic
IAS EXPRESS Vs UPSC Prelims 2024: 80+ questions reflected
What is the current situation?
- In September last year, Europe discovered that renewable energy doesn’t always mean reliable energy. They rushed to purchase natural gas to address the demand-supply mismatch.
- The rush resulted in LNG prices spiking– leading to unaffordability.
- As natural gas is used in manufacturing urea, it caused a spike in fertilizers prices. Consequently, food items became more expensive.
- The situation is a reminder that despite the enthusiasm around renewable energy and electric vehicles, the world continues to depend heavily on oil, natural gas and coal.
Why is this of concern?
- In the recent times, getting new investments for traditional energy projects has become more difficult. This could potentially lead to a situation of record high prices, as was witnessed in the early 2000s.
- It is of concern to India given its import dependence: the country imports some 4 million barrels of oil in a day (i.e. 1.4 million barrels in a year). This is only expected to go up in the coming years.
- It is true that the government and other stakeholders are widely discussing electric 2-wheelers. However, the efforts are unlikely to affect the country’s oil consumption in a meaningful way- at least in the near future.
- This is because electric 2-wheelers constitute a small segment of the entire 2-wheeler market. The 2-wheeler market itself accounts for a small fraction of India’s petrol demand. Petrol, in turn accounts for less than 15% of the country’s total oil consumption.
- More than 40% of the country’s oil consumption is as diesel– mostly used by heavy trucks. Electric mobility in heavy trucks is not currently possible.
- In toto, India will continue to remain oil-dependent.
What can be done to secure India’s oil needs?
- For the past 2 decades, India’s state owned oil majors have been investing in oil and gas fields worldwide.
- Investments have been made in Azerbaijan, Russia, Iran and Venezuela– traditional oil producers.
- These investment, however, have been made by considering the past production trends.
- Meanwhile, over the past decade, bulk of the oil production has been from the USA and Canada, which are riding on oil sands and shale oil. Australia has become an important natural gas exporter.
- Hence, India needs to consider these developed countries, which are resource rich and provide a more predictable and stable business environment.
- Indian companies should focus on acquiring minority stakes in listed oil companies, rather than trying to acquire and operate oil and gas fields in these countries. This will eliminate the need to deal with the operational complexities while serving the purpose of ensuring energy security.
- Over these past 75 years, the country’s problem with oil has been about the prices, not about the physical supply of oil.
- In such a case, financial investment in oil companies will produce greater incomes for the country when the oil prices go up, while offsetting the higher import prices to a certain extent.
- India is located next to the largest oil exporters in West Asia. The returns from oil investments could be used to purchase oil from this region.
- Shares of an oil company can be purchased in small batches and the investment can be built up over time. This is unlike in case of oil fields, which are unique assets that have to be acquired as blocks.
- The BP oil spill in the Gulf of Mexico shows that accidents in this sector have no upper limits for liabilities in the Western world. In this light, India trying to insulate itself from energy price spikes by acquiring oil fields, may end up taking on additional liabilities. This wouldn’t be prudent.
- Free market economies tend to frown on large takeovers by state-owned entities. Eg: the US and Canada have acted against such takeovers by Chinese stated owned entities in the past- CNOOC (Chinese entity) had to step back from acquiring Unocal (of the USA). CNOOC successfully acquired Nexen (of Canada), but the Canadian government clarified that similar deals won’t be entertained in the future.
- Instead of this route, India could set up a wealth fund to make investments. This fund will operate purely as a financial investor.
- Oil rich regions like Kuwait, Abu Dhabi and Norway have been channelling a part of their oil revenues into Sovereign Wealth Funds. This is done to offset periods of low oil prices.
- India, as a major oil importer with growing demand, is vulnerable to fluctuations in oil prices. It can use the same approach, but to offset periods of high oil prices.
- When oil prices are low, like it was between 2015 and 2020, some of the windfall can be moved to such a sovereign wealth fund. It could then aid the country tide over periods of high prices.
Conclusion:
India is unlikely to significantly reduce its oil consumption in the near future, despite its push for renewable energy and electric mobility. To secure its oil needs, the country must adopt investment approach instead of risk-prone oil operations abroad.
Referred Sources
If you like this post, please share your feedback in the comments section below so that we will upload more posts like this.
