The threat of the Omicron variant has spooked global markets, taking oil prices lower. But this could be only transient as global oil demand still exceeds supply this year. Brent crude prices ruled at levels of $71 a barrel last week, well below the average of $84 in October, but are substantially up on the start of 2021. The impact of high global oil prices is bound to be serious for countries like India, which imports 85% of its requirements. For India, costlier oil implies a higher import bill and inflation. Indications are that the crude import bill this fiscal is likely to exceed last year’s level of 196.5 million metric tonnes, worth $62.2 billion. Till October this fiscal, India imported 118.5 MMT worth $61.1 billion, as against 104.6 MMT amounting to $26.9 billion in April-October 2020-21.
Costlier oil stems from global oil supply not growing fast enough at 95.97 million barrels a day to meet the recovering demand at 97.53 million barrels a day in 2021, according to the short-term outlook of the US Energy Information Administration. Oil prices have risen over the past year due to steady drawdowns of global oil inventories. The Organisation of the Petroleum Exporting Countries and its allies reaffirmed on December 2 that they will keep production targets unchanged to raise output by 400,000 barrels a day in January 2022. However, the grouping will closely monitor the market situation and may meet again if prices slide further. But there are cautious grounds for optimism that with higher supplies outpacing slowing global demand, Brent crude prices may fall to an average of $72 a barrel in 2022.
To reduce vulnerability to high and volatile global prices, determined efforts must be made to increase the levels of relative self-sufficiency by stepping up domestic oil and gas production. Unfortunately, this is not happening. Domestic crude production has been steadily declining from 38.1 MMT in 2011-12 to 30.5 MMT in 2020-21. Till October this fiscal, production at 17.4 MMT is virtually unchanged from the levels during the corresponding period in 2020-21, according to the Petroleum Planning & Analysis Cell. Domestic production is falling due to declining output from old and marginal fields. India lacks the technological capability for deepwater exploration. There have also been no major hydrocarbon discoveries of late either. The preferred strategy in recent years is to pick up stakes in foreign oilfields to enhance India’s energy security.
But with elevated international oil prices, stepping up domestic production must be prioritised at all costs. Indian state-owned oil majors like the Oil and Natural Gas Corporation must be able to generate internal resources to undertake exploration. Unfortunately, this cannot happen if ONGC is asked to give away a 60% stake plus operating control in India’s largest oil and gas producing fields of Mumbai High to foreign companies and divest its drilling and services arm to become asset light, among others. This prompted a former Union secretary, EAS Sarma, to write to the Prime Minister that instead of “weakening” ONGC, the government should adopt a conscious strategy to strengthen its ability. While addressing global oil and gas CEOs, PM Narendra Modi told them that the focus has shifted from revenue to production maximisation. This should be welcomed. Domestic oil majors like Cairn Oil and Gas have stated that as much as 70% of their revenue generation goes as levies to different governments while costs of running operations take up 20-25%, making it difficult for them to invest in capital-intensive technologies. Domestic oil producers must be incentivised to produce more to reduce import-dependence over the medium-term.