In today’s Finshots we talk about weaponizing our dependence on oil, and see if there's merit in pursuing such a program
The Story
Most of the world’s oil is controlled by a very small group of people - the Middle Eastern Cartel called OPEC, US, and Russia. The cartel, dominated by Saudi Arabia is the kingpin here. They hold vast influence over the market and they are one of our biggest suppliers. We also ship a lot of oil from Iraq and the US. But let’s focus on Saudi Arabia for now.
You probably remember how oil prices reached ridiculous low’s last year. In fact, it pushed a lot of these middle eastern countries to the brink. Eventually, they managed to reach a deal and collectively decided to cut oil production in a bid to prop up prices. They’ve persisted with their program ever since. Unfortunately for us, this has been a sore point. Fuel prices have been increasing disproportionately each month and the Saudis have continued to artificially curtail supply.
The Indian government made its displeasure known. Our oil minister Dharmendra Pradhan urged Saudi Arabia and OPEC to pump more oil and stabilize prices. In response, Saudi Arabia’s energy minister cheekily asked India to use its strategic crude reserves — reserves built up when oil prices had slumped last year. And while you might think we are at the mercy of OPEC, that isn’t necessarily true.
Yes, we are one of the biggest importers of crude oil. But we also have buyer’s clout when it comes to sourcing good deals. So we could potentially tell the likes of Saudi that we’d source alternatives from elsewhere if we didn’t get a good bargain on the oil we ship. In fact, this could be seen as India’s latest attempt at weaponizing its purchasing power, according to this report by Reuters. News reports also allege that the government has already asked state-owned refineries to cut down crude imports from West Asia — especially Saudi Arabia. And just last month, United States overtook Saudi Arabia as India’s second-biggest oil supplier after Iraq. So clearly there is something interesting brewing here.
And look, it’s not just Saudi Arabia’s belligerence that’s pushing us to source alternatives. There’s something else happening on the sidelines.
Think applications of crude. Oil from Saudi Arabia isn’t the same as oil sourced from Africa. The African oil (from Angola and Nigeria) is the lighter grade stuff. It yields more LPG and petrol but doesn’t give you boatloads of diesel. The oil from the Middle East is usually medium-heavy grade. It yields a lot of diesel but doesn’t do so well if you’re looking for petrol or LPG. And it’s this heavy stuff that most refiners in India use considering we are still dependent on diesel a lot.
But in the last year or so, demand for LPG and petrol has surged quite a bit. Diesel consumption meanwhile hasn’t really taken off. So there’s been an added incentive for refiners to ship more oil from African countries. But the volumes aren’t substantial. If India is seriously looking for alternatives elsewhere, then we have to consider other costs.
Think shipping costs. Importing oil from Africa, Venezuela or the US is expensive because it takes a lot longer for us to move cargo between countries. Besides, there is also the question of reliability. Can you trust the likes of Venezuela to really step in and meet our lofty demands? Can these nations guarantee bountiful supply? We don’t know. In fact, last month we started sourcing oil from a small South American nation — Guayana, for the first time ever. It was a welcome development by all accounts. However, Guyana is 14,606 km away from India. And there are fears that the country might slip into civil war soon. So you can’t be sure they’ll come through when we need them the most.
However, that doesn’t mean the middle eastern countries can take us for granted either. Saudi Arabia is already losing its biggest customers in the developed economies — all of whom are steadily moving away from fossil fuels. That leaves Saudi at the mercy of oil-hungry markets like India who are only looking to buy more, not less. Besides, they are the fourth-biggest trading partner and their state-owned oil companies have big investments in India. So they have a lot to lose here as well.
Bottom line — We are mutually dependent on each other and it is probably in our best interest to figure out a compromise before things start spiralling out of control.
Until then…
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