Sainav Anand is a second-year student at Jindal School of Banking and Finance, and has a passionate interest in the stock market, global events, and domestic politics. He is a currently a content writer for Arthaniti – JGU’s Economic Society.
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On 2nd April 2020, India witnessed the tenth hike in fuel prices in 12 days after there being no change in the prices since November. The fresh rise takes the total increase in fuel prices to Rs 7.20. Fuel prices in many states of India have crossed the Rs.100 mark.
A growing economy needs high consumption of different sources of energy. India is among the nations producing very little crude oil on its own compared to its consumption needs, which obligates it to import most of the crude oil from different countries to fulfill its oil consumption needs. This dependency also brings compulsion to adhere to the crude oil prices in the international market. Whenever the price fluctuates, it directly affects it's domestic petrol and diesel prices.
The recent hike in international fuel prices, which can be accredited to the war tensions between Russia and Ukraine, shifts the burden of inflation on Indian consumers. The war tensions have disrupted the global crude oil supply chain, but opportunities have arisen for India, with Russia offering crude oil at discounted prices.
Still, the question that remains is whether India has the capacity to completely shift its crude oil supply chain from middle east countries to Russia. In this article, I analyse India's dependence on crude oil and the effect of the hike in crude oil prices on India, and the impact the potential oil deal between Russia and India will have on India's economy and global image.
Effects of Ukraine-Russia war tensions on Indian crude oil prices?
The military invasion of Ukraine by Russia began on 24 February 2022. The Russian invasion impacted the global supply chain of crude oil drastically, forcing the already inflated prices of crude oil in the international market to go up further.
As Russia and countries part of the NATO alliance are standing against each other, it further deteriorates the whole situation as most European countries that are a part of NATO are heavily dependent on Russian crude oil. Still, they are obliged to impose economic sanctions on Russia which include decreasing their dependency on Russian energy and resources such as gas and oil.
As long as the war tensions continue, the aggression of the economic sanction by NATO-allied countries on Russia will increase, which will result in a hike in international crude oil prices because of which petrol and diesel prices in India will continue to hike further.
The only way left for the Indian government in the price hike scenario of crude oil is to pass on the price hike to the consumer by increasing the price of oil and diesel, resulting in higher inflation in the economy. As the inflation goes up, the interest rate on our money deposited in the bank also goes up. This is done by the country's central bank to maintain the inflation.
As the interest rate on our bank deposits goes up, the demand for various products in the economy falls because the consumers prefer to keep their money deposited in the bank to fetch higher interest on that money which results in decreased consumer spending on various products which brings down the demand of various products.This results in the reduction of prices of the products and controlled inflation rate.
The interest rate hike arising because of inflation also impacts the financial markets of an economy. As more and more people keep their money in banks for to benefit from higher interest rates, it affects the willingness of different retail and institutional investors to invest in the financial market.
What the potential oil deal between Russia-India is all about?
As Western sanctions tighten, Russia is looking for new markets for its oil exports. India is one of the most affected countries because of the hike in crude oil prices and is exploring its options for new exporters of crude oil at discounted prices. The Russian government offers India a big discount on the purchase of 15 million barrels of oil. Despite the recent surge in global oil prices, Russia is willing to sell up to $35 per barrel of high-grade oil, which could increase to 45 per barrel after the latest deal. The first agreement calls for India to purchase 15 million barrels. This could be a great start to a big oil deal in the future.
If the quantity of oil deals grows well, India's import bills and inflation situation could be eased a bit, but the reality is slightly different. These sort of deals takes time. Only 2% of India's total imports came from Russia in 2021. India did not import any oil from Russia in January or February. Last year, the majority of the supplies came from the Middle East, with significant quantities also coming from the United States and Nigeria.
Currently, India is heavily dependent on its imports of crude oil from middle eastern nations. It will be really tough to shift its supply chain from these countries to Russia. The price of crude oil is not the sole factor in trade. India also needs an appropriate infrastructure to import crude oil from Russia. Logistics is an equally important factor to consider for the deal with Russia, which is not in line to trade such huge quantities of crude oil in a short period of time. By the end of the year 2022, the Indian administration might be in a situation to execute the crude oil deal offered by Russia completely.
Conclusion
Even if the deal between Russia and India is agreed, there is the question of how much crude oil Russia is willing to offer. India's annual petroleum consumption for 2019-20 was 214.1 million tonnes of petrol, diesel, and LPG. In the first 10 months of the fiscal year 2021, the demand for petroleum products grew by 4.2%. This implies that the consumption of crude oil for India is huge and is marginally increasing every year.
Further, even if the oil deal gets executed it may not have a direct effect on diesel and oil prices. The import of crude oil from Russia may go to the strategic reserve of India, which India may store for a war-like situation whenever it is unable to import or export oil from other countries.
When it comes to India's global image if it imports Russian crude oil, the effect may not be all that negative because Russia exports about five million barrels of crude oil per day, more than half of which is sent to Europe. About a third of the extra-EU's crude oil imports were from Russia in 2019 (27%). This clearly implies that dependency on Russian resources is not going to vanish overnight. As long as Europe imports a heavy quantity of energy supplies from Russia, they will not have any moral right to blame India, which is still importing a negligible quantity of crude oil from Russia.
External Affairs Minister S Jaishankar affirmed the same while addressing a joint news conference with his American counterpart, Secretary of State Tony Blinken. He said, “India’s total purchase of oil from Russia in a month is probably less than what Europe does in an afternoon’’ while defending a question about Russian- Indian oil deal. He highlighted the hypocrisy of the European countries when it comes to importing huge amount energy supplies from Russia.
Any small increase in imports from Russia will also be considered irrelevant as long as the size of import of crude oil is small, there will be no significant effect of it on India's global image, nor India will attract any sort of economic sanctions from the western world.
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