Falling crude oil price a gift for India? Wait, it could hurt in a whole different way

By: | Updated: June 25, 2018 11:46 AM

Crude oil prices: At the moment, Oil Minister Dharmendra Pradhan is in Vienna, fiercely advocating for "responsible oil pricing" from the OPEC. While high crude oil prices hurt, low crude oil prices hurt too; here's why

Crude oil conundrum: When high oil prices hurt and when low oil prices hurt tooIf crude oil prices do fall below a barrel, analysts say that it may hurt India’s investment prospects in domestic oil production. (Image: Reuters)

Crude oil prices: At the moment, Oil Minister Dharmendra Pradhan is in Vienna, fiercely advocating for “responsible oil pricing” from the OPEC as not only do they lead to higher fuel prices back home but also hurt India’s GDP, widen current account deficit and stoke inflation. Whether or not the OPEC countries would come on the same page to increase production — and if they do, by how much the oil prices will fall for a sustained period of time — will be known later. However, if crude oil prices do fall below $60 a barrel, analysts say that it may hurt India’s investment prospects in domestic oil production.

India’s crude oil production fell for six straight years between financial years 2012 and 2018, albeit marginally, due to lack of efficient production and drilling from matured oil fields, but primarily due to lack of investment. “Investment in private oil fields do get impacted by lower crude oil prices as does globally. ONGC, however, has government’s support and do not get much affected by oil price volatility,” Vivek Jain, Director, India Ratings and Research told FE Online.

But for private companies, the realisation from oil investments have to be higher for them explore the oil industry in India, Vivek Jain added. India ranks 24th in oil production globally and produces 15% of the crude oil that is consumed domestically. India needs about $300 billion (or about Rs 20 lakh crore) in investments over the next 10 years to boost the production of natural gas and crude oil to meet the growing demands.

ONGC and Oil India and private companies such as Reliance Industries, Cairn India, Essar Oil, Gujarat State Petroleum Corporation, Jubilant Oil and Gas, Focus Energy, Naftogaz and others explore and produce oil in India. As India aims to cut its crude oil imports by 10%, consultant Wood Mackenzie said that the oil producers have to raise production from its ageing oil fields — and seek help from foreign companies to achieve the goal. Seeking to raise output through only new discoveries will take too long, Wood Mackenzie said in October last year.

Taking the cue from the US

The story of the United States of moving from being oil producer and consumer, to oil consumer and importer, and then back to oil producer and consumer is fascinating enough for India to follow its footsteps. Reuters market analyst John Kemp recently wrote that since the 1860s, the United States has been world’s largest producer and consumer of oil. Until World War II, it remained a net exporter of crude oil until it started turning a net importer in the 1940s-50s. Then put pressure on the oil demand, in turn, putting pressure on US’ balance of payments and the dollar’s value.

Now, while the United States remains an important net importer of crude (roughly 6 million bpd in recent months), it has also become an important exporter. The US balance of payments is much more insulated from the impact of changing oil prices, John Kemp wrote.

First published on June 22, on www.financialexpress.com

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