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  4. PM Modi's oil diplomacy: India's move to import crude oil from US significant, may ignite price war in international markets

PM Modi's oil diplomacy: India's move to import crude oil from US significant, may ignite price war in international markets

The arrival of the first shipment of crude oil from US signals India's shift from dependence on supplying nations like Iraq and Saudi Arabia.

Parimal Peeyush Written by: Parimal Peeyush New Delhi Updated on: October 03, 2017 17:00 IST
India diversifying its oil portfolio will be beneficial in
India diversifying its oil portfolio will be beneficial in the long term.

As domestic retail oil prices continue to grab headlines for all the wrong reasons, the arrival of the first shipment of crude oil from the US at Odisha’s Pradip Port on Monday marks an end to the US’ oil export hiatus since 1975, and signals significant impact on India in terms of cost, its oil dependence as well as trade ties with the US. Crucially, it helps India undercut much of OPEC’s control on matters related to oil in our country, the third largest oil consumer in the world.

Although the impact of India diversifying its oil portfolio to the US will be visible over a period of time, its long-term benefits can be immense. Besides furthering  ties with the US – the deal was finalised when Prime Minister Narendra Modi met US President Donald Trump at the White House in June this year – it provides India the leeway to cut its dependence from its biggest oil suppliers Iraq and Saudi Arabia, giving it a stronger foothold on geopolitical influences.

The OPEC Factor

The development comes at a crucial time for India, with OPEC nations deciding to substantially cut down oil production over the coming months and reduce shipments to Asia and the US. In September 2016, the Organization of the Petroleum Exporting Countries decided to cut crude oil production by 1.2 million barrels per day (mbpd). This had triggered fears of a rise in price and the subsequent subsidy burden on the government’s finances.

Also Read: India receives first-ever shipment of US crude oil at Odisha's Paradip Port

Though petrol and diesel prices are decontrolled, the government continues to subsidise the price of LPG and kerosene.  India, being the fourth largest importer of crude oil, imports 85 per cent of total oil and 95 per cent of gas from OPEC nations. Given India’s dependence on oil imports for meeting its needs, the impact of the production cut by OPEC was expected to be significant. Note that the impact of Saudi Arabia’s oil prices also affects the cost of other West Asian producers. With Saudi Arabia’s Aramco upping crude price by 60 cents per barrel for Asian buyers, US crude, which has seen a boost in production, became a better option. 

The current economic dynamics signify much of the sway that OPEC still holds on the government’s finances. We know by now that taxes levied by states and central governments make for much of the retail prices that consumers have to shell out. While these details have been written about extensively, understanding the impact of higher crude oil prices requires an understanding of the windfall that the Centre has made in times of low crude oil prices.

A total of 12 increases in central excise duty have been effected by the government since November 2014, resulting in the government making Rs 5.24 lakh crore as revenue from petroleum products in 2016-17, up from Rs 3.32 lakh crore in 2014-15. States also receive 42 per cent of the Excise Duty charged by the Centre, according to Oil Minister Dharmendra Pradhan, signifying the importance of revenue from oil on states as well.

While one may argue that lower price of crude oil has not translated into benefits for the common man, its impact on the economy is significant. It is in this context that India’s move to import crude oil from the US is significant. Some of the impact started getting visible soon after the deal was finalised in June.

An Economic Times report cited Indian Oil officials as saying that soon after India had secured its first US buy, Iraq, India’s biggest crude oil supplier decided to lower its prices in a bid to retain its hold on India’s immense demand for oil. West Asian imports currently make up for 73 per cent of India’s imports, with Brent making up for the rest.

Maths of rising petrol, diesel prices: Blame taxes, not crude oil for steep hike in fuel cost

Better Price

India Tv - First shipment of US crude oil arrives at Odisha's Paradip port

First shipment of US crude oil arrives at Odisha's Paradip port

Other than the OPEC factor, and the leeway this energy mix gives India to press for better prices from its supplier nations, the basic cost factor also makes US crude a viable option. As per officials, the US crude oil is $2 per barrel cheaper to India as compared with the most-imported West Asian crude.

Indian officials say that even after factoring in the distance, US oil is working out to be cheaper than Middle East oil. India now wants to leverage its status as a major energy buyer to get a better price, but also more importantly, to make a political point to its suppliers.

Tougher oil supplying partners like Iran can also be pressed into better prices. This, after India dropped its intake of oil from Iran over Tehran's non-cooperation on a promised gas field.

Bolstering Indo-American ties 

India Tv - New Prosperity crude carrier delivered the first shipment of US crude to India

New Prosperity crude carrier delivered the first shipment of US crude to India

Mary Kay Carlson, Charge d’Affaires at the US Embassy in India said that the shipment comes as a milestone in the blooming bond that India and the United States are experiencing at present.

She said that both the countries are cooperating in improving the condition of the energy sector by opting to move towards cleaner fossil fuels, nuclear, renewable and energy efficiency technologies.

The US Embassy said that they are looking forward to increasing the sale of the US crude oil to India and exploring the opportunities that would lead to an expansion in the role of natural gas in the country.

At their meeting on June 27 at the White House, PM Modi said India had one of the world's fastest growing energy demands, in response to Trump's line about reviving American energy exports. Modi responded that India would consider it if the price was right. The two countries also entered into a Strategic Energy Partnership for increasing the bilateral energy cooperation between the two countries.

Energy trade between the nations is set to expand as India takes steps to enhance the use of natural gas in its energy mix. India is also expanding its infrastructure for piped natural gas and liquefied natural gas used in cooking.  It is in the context of future prospects of India-US energy ties that this recent import marks significance.

Though Indian Oil's consignment is worth only $100 million, a miniscule fraction of India's $70 billion oil import bill for 2016-17, it has a potential to grow into a $2 billion trade. Significantly, the import indicates the strategic ties between India and the US are expanding beyond defence and intelligence to energy.

How will India use US Crude?

State-owned Indian Oil Corporation Ltd imported 1.6 million barrels at the Paradip Port in Odisha. Indian Oil will process this crude at its refineries in the East: at Paradip, Haldia, Barauni, and Bongaigaon.

“IndianOil, which became the first Indian public sector refiner from India to source US crude, has placed a cumulative order of 3.9 million barrels from the US,” Indian Oil said.

Public sector refiners Bharat Petroleum and Hindustan Petroleum have also placed orders from the US for about 2.95 million barrels and 1 million barrels respectively, for their Kochi and Vizag refineries.

The total volume of the crude presently contracted by Indian public sector refineries is, therefore, 7.85 million barrels. The three refiners are sourcing sweet, sour and heavy crude for their refineries which are equipped to handle complex mix of crude oils.

Indian oil companies have already invested over $5 billion in US shale assets. Indian companies have also contracted MMTPA of LNG from the US and the first shipment is expected to be delivered to India in January 2018.

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