In the aftermath of the US-Iran war, what is the outlook for the global oil market? Will new sanctions-related risks emerge? Finally, what strategies will oil producers and buyers adopt to manage geopolitical risks? Amit Bhandari, Gateway House Fellow for Energy & Environment, explores these questions from an Indian perspective.
These three questions are relevant for India because of its voluminous oil consumption and rising imports. India relies on imports for over 85% of its petroleum needs and currently consumes over 4.5 million barrels per day of oil. This number is projected to increase to 10 million barrels per day over the next 15-20 years. Therefore, each of these issues is relevant to India.
Outlook for the Global Oil Market
There is a comfortable surplus supply in the global oil market. This is evident from the fact that despite the single biggest disruption since World War II, prices have stayed well under control. As of early July, while the oil flow through the Strait of Hormuz is much lower than the long-term average, the price of oil is back to its pre-crisis levels.
This is a sharp contrast from the 2005-07 era, when the oil supply was tight, and news such as an accident at an oil field or a terror attack in an oil-producing country was enough to send the price rising. Judging by the relatively sluggish movements in oil prices—compared to the magnitude of such moves historically—it can be concluded that the global oil supply comfortably exceeds the demand.
Historically, OPEC has been regarded as the swing producer in the oil market, which sets prices by reducing or increasing oil production. However, this has not been the case for the past several years, largely due to rising oil production in the US, and falling oil demand from the Western world. The shale oil producers in the US are the true swing producers now. Within OPEC, Saudi Arabia and the UAE have historically maintained ‘spare production capacity’—which helps keep markets stable. However, this also represents hundreds of billions of dollars of idle capex.
Will new sanctions-related risks emerge?
Amid the US-Iran conflict, the US initially tried to change the status quo in the Persian Gulf using kinetic means, and has failed to achieve its originally declared objectives. Therefore, it will increasingly rely on non-kinetic means, meaning sanctions.
It is mostly the US and Western nations which impose sanctions. While most non-Western governments don’t recognise American or unilateral sanctions, corporations have to contend with the reality of American centrality to the global financial system and have to plan and act accordingly. If I am a large oil company, I have global operations and require access to the international financial markets. I cannot afford to run afoul of US sanctions. RIAC has done significant work on US sanctions, and readers should review their papers on the subject.
Russia and Iran will continue to be at the receiving end of these sanctions, which will be periodically used as leverage, over sellers as well as buyers. Given the surplus of oil in the world market, the US will have greater freedom of action than in the past, and sanctions will have a greater impact on oil exporters.
What strategies will oil producers and buyers adopt to manage geopolitical risks?
Historically, India has invested in overseas oil and gas fields since the early 2000s, to reduce the financial exposure to high oil prices. However, over the past decade, outbound acquisitions by Indian oil companies have virtually come to a halt. This could have been due to the loud and public signalling by the Indian government regarding renewable energy and green technologies. Most of the Indian oil industry is owned by the government, and if your largest shareholder has decided that oil is on the way out, a professional manager is unlikely to stick his neck out and go for a major acquisition.
Since 2019, Indian policymakers have pushed aggressively for electric vehicles, including support for manufacturing and other subsidies. However, penetration remains low at less than 5% for cars and 10% for two-wheeled vehicles. This is the share of EVs in total vehicle sales over the last few months – the actual stock of EVs as a segment of the vehicle population will be lower. This is perhaps the lowest penetration of EVs for any major automotive market. Unless the issues related to the supply of critical minerals, including rare earth magnets, and China’s dominance of the supply chain are addressed, adoption will lag.
The other way in which India is trying to deal with high oil prices is by aggressively pushing for biofuels – ethanol which can be blended with petrol. This is a faulty strategy, as it co-opts agricultural land in order to grow cheap fuel. The ‘savings’ from importing less oil are illusory, as India ends up importing more oilseeds and pulses – crops which have been supplanted by biofuels. Crops used for ethanol production – sugarcane and maize – are also water intensive, and India remains the most water-stressed among the major economies. Considering these factors, my view is that ethanol is a less efficient solution to the oil question, and is unlikely to be a viable alternative.
In summary, India has no options regarding hydrocarbons – the dependence on imported oil is not going to change. The best bet for India would be to revive investments in overseas oil, and to ensure that new reserves keep reaching the market. A well supplied oil market is the reason why the US-Iran war didn’t become an enormous energy and economic shock. As an oil buyer, India should invest to make sure it remains so.
