9 April 2020, NIICE Commentary 3997
Monalisa Dash
Amid the outbreak of COVID-19 pandemic, the global economy has paralyzed. The suffering of giant global economic powers due to spread of COVID-19, has brought a cause of concern for many countries. However, in the midst of this, the spat between two major crude oil producing giants – Saudi Arabia and Russia has created an unprecedented oil price war in international politics. This has come out as a boon and bane for many countries, including the rising Asian powers like China and India. However, India has reacted positively to these recent geopolitics of international crude oil prices. Indian authorities have taken this as an opportunity for Indian economy as the latter is going through worse phase since India’s economic liberalization in 1991.
Politics Behind the Crude Oil Price War
The spat and differences between Riyadh and Moscow, two major oil producing countries came amid the outbreak of the COVID-19 pandemic, the slow growth of giant economies like China and India, a wave of de-globalisation and the emergence of the US as the biggest oil producer. Collapse of international Brent crude prices has been welcomed by the US. The US, since it’s extraction of shale oil and gas since 2015-16, has emerged as one of the leading producers and exporter of oil and gas to other countries, including India, due to which the OPEC and other oil producing countries are thinking to continue the US’s presence in international oil market. As Saudi Arabia has started a price war against non-OPEC country Russia, the crude oil price saw a biggest fall by 30 percent since the 1990s Gulf War. In order to strengthen its position in international oil market, Riyadh has opted to increase its production and further cut crude prices and enhance export to strengthen its economy. Saudi Arabia, being a leading producer of crude oil, is dependent upon fuel as biggest source of revenue for its economy. But, the slowing demand and sluggish growth of major industrialized countries, and the ongoing COVID-19 pandemic has generated concerns for Riyadh. Moreover, the recent diplomatic differences between Saudi and Russia has compelled the former to raise its production unilaterally by undermining Russia and OPEC cartels. The move is going to, or has already, hit the slow growing world economy. However, according to Fatih Birol, the Executive Director of International Energy Agency (IEA), “with a combination of a massive supply overhang and a significant demand shock at the same time, the situation we are witnessing today seems to have no equal in oil market history. “
The Price War – Boon for India
Over the past month, the oil price war between two major oil producing countries has sent a positive sign towards New Delhi. The Indian economy, which is already going through its toughest phase in recent decades, has seen this crude oil price war as an opportunity for its struggling domestic economy due to slow growth rate and slow demand. As per the Economic Survey presented by the Finance Minister Nirmala Sitharaman, Indian economy which imports nearly 83 percent oil from international oil market, had spent USD 87 billion in the fiscal year 2018-19.
India being world’s third largest oil importer and the fourth largest LNG importer, the drop of oil prices in three decades is a big relief for its economy. In the fiscal year 2014-16 too, India took advantage of lower crude oil prices. However, the change of geopolitics and the rise of prices since 2017 had been a cause of concern for New Delhi. Since, Indian economy has greatly been influenced by oil prices, stability of West Asia and oil market is of utmost importance for India. Moreover, since the US’s withdrawal from the Joint Comprehensive Plan of Action (JCPOA), also known as the ‘Iran nuclear deal’, and its further unilateral imposition of sanctions on Iran, has destabilized the region compelling India to look beyond Iran for its crude oil. Hence, now the lowering of oil prices and surge of production by Saudi Arabia is definitely going to benefit India. As Indian economy is witnessing its lowest GDP growth in recent years, a low oil prices will boost India’s economic sectors significantly. A relative low crude oil price will improve India’s balance of payment and will stabilize its current Account deficit as well as Fiscal deficit.
Furthermore, Saudi Arabia’s decision to raise oil production will benefit India directly as the latter is the seventh largest oil importer of Riyadh, and the state run, Saudi Aramco has agreed to invest in India’s petro-chemical fields. The share of oil prices by Saudi Arabia will strengthen India’s energy security in West Asia and will stabilize relationship between Riyadh and New Delhi. Since, India has stopped crude oil import from Iran due to sanctions, now it will look forward towards other countries to fulfill its energy demand. Saudi Arabia’s unilateral decision to raise oil production and cut fuel prices will force India to import more from Saudis at an affordable Brent price.
Way Ahead for New Delhi
Stability of oil market and low Brent crude prices is always in favor of Indian economy. As a rising economic power, India’s economic activities are solely dependent upon imports of fuel. In recent years, India has diversified its energy sources by investing more on renewable energy sources. But, as the renewable energy needs a long-term response, India is importing a major portion of fuel from OPEC and other non-OPEC cartels. Hence, the current oil price war between Saudi Arabia and Russia is significantly going to benefit India. The Indian government needs a comprehensive plan of actions to take advantage of this geopolitical spat between Riyadh and Moscow.
