Global oil price crash an opportunity

Why the rest of the world sneezes when China catches cold is no longer a conundrum as events in the first few weeks of 2016 conclusively demonstrated that are manifest in the multiple woes of the world economy in general and crude oil price plunge in particular. Even as coal accounts for about 70 percent of aggregate Chinese energy consumption, Prof. Stephen Roach of the Yale University believes that the Middle Kingdom’s “role in driving world oil demand is also crucial”. He estimated that in the decade ending 2014, growth in Chinese consumption accounted for 48 percent of the total growth in global oil demand”. As such, it is small wonder that Chinese reduced consumption of oil, after such a headlong and hectic high economic growth spread over three decades, explains much of the recent collapse in crude prices.

More than the pronounced decline in Chinese oil consumption in recent years as it transforms to slower growth, led by low-carbon services, western oil market analysts contend that the decline in the price of crude directly concerns oil-exporting nations led by the oil cartel the Organisation of Petroleum Exporting Countries (OPEC), besides Russia, Mexico, and Brazil, the emerging economies. The virtual collapse in oil prices in the past 18 months that got accelerated from early this month meant a massive concussion in tax revenues on oil producers from Russia, South America and the West Asian nations, besides a few in Africa including Nigeria and Gabon.

No doubt, the dawn of the New Year brought cheerful comforts to India as the global crude prices plunged precipitously in the early days of 2016, bringing in its train the much-needed cushion on the balance of payments front to the domestic economy heavily dependent on imported crude oil. For India which, is meeting more than 80 percent of its oil requirements through imports, the steep decline in global prices to as low as 24 US dollars a barrel with a likely 20 dollars a barrel before long meant that its import bill on oil account would get drastically slashed to spare the foreign exchange reserves for spending on other essential industrial intermediates to rev up manufacturing growth. India’s secondary sector growth, which is in a moribund state needs to be given the right spurs as it alone can fulfill the demand for generation of gainful employment opportunities to a vast swath of its demographically dynamic youth populace coming out of the professional educational portals in droves.

Undoubtedly, within just two weeks of 2016, the price of Brent crude has crashed by 16 percent to 24 dollars a barrel, bringing baneful fallouts to the global economy that is plagued by anemic recovery. It needs to be recalled that from 2010 until mid-2014, world oil prices had been fairly stable, at around $110 per barrel. But since June 2014, prices have been on a sliding and slippery patch with the latest one of Brent crude plunging to a new 12-year low on January 14 as the prospect of more oil supplies from Iran loomed in the midst of a market already awash with glut of oil and the tepid global economic recovery. The global benchmark Brent crude dropped as low as 29.73 dollars a barrel, the lowest since February 2014.

The obvious reasons for this slide in crude are twofold—weak demand in many countries due to anemic economic growth coupled with surging US production and no organised and coherent attempt by the oil cartel OPEC to cut production to create scarce supply situation. On the other hand, OPEC is determined not to cut production as a way to prop up prices. Add to that the war in Syria and Iraq had also seen Islamic State (IS) capturing oil wells. Western analysts contend that IS is estimated to make about three million dollars a day through black market sales—and undercutting market prices by selling at a significant discount –around 30-60 dollars a barrel. In this free-for-all supply situation, the price of crude must perforce fall and it is falling to the consternation of oil producing nations.

The results are mixed in the sense that for oil producing countries of the Organization of Petroleum Exporting Countries (OPEC) and also others such as Russia and Mexico, the steepest fall in crude prices had crashed and dashed their hopes for sustaining development momentum as their main export income was based on oil. For India, analysts contend that the benefits from a lower crude oil bill would not be substantial though they may still be relatively moderate as its remittances income from West Asian sources would be considerably diminished in the light of weaker economic conditions in oil-producing nations. However, the low crude price provides a window of opportunity for both India and China, the two major oil importers, to step up import both for processing and building their strategic petroleum reserves (SPR).

Already, the Government of India in the interest of energy security is setting up strategic crude oil reserves with a storage capacity of 5.33 million tonnes (mt) at three locations namely , Visakhapatnam (storage capacity 1.33 mt), Mangalore (1.5 mt) and Padur (2.5 mt). While filling of crude oil in Vishakhapatnam storage facility has been completed, facilities at Mangalore and Padur are under consideration. In order to further augment the strategic crude oil storage capacity, a detailed feasibility report has been prepared for construction of additional 12.5 mt in Phase-II at four locations namely Bikaner (3.75 mt), Rajkot(2.5 mt), Chandikhol (3.75 mt) and Padur (2.5 mt). With the global crude prices on the wane, time is ripe to procure additional oil from diversified sources to stockpile them for future energy security of the country, oil analysts argue.

For the national oil companies like Oil and Natural Gas Corporation (ONGC) and Oil India Limited (OIL), the lower cost of imported crude meant a considerable savings in their operational cost as these public sector undertakings have already set off moves to engage consultants to suggest cost cuts and keep a leash on operating expenditure. It is time mandarins in the Ministry of Petroleum and Natural Gas resisted prevarication and policy inertia by plunging into action to beef up energy security and promote green energy making the extant opportunity gratuitously served by the steep drop in imported crude oil prices. Any slackness now or complacency would entail and exact enormous cost later to the economy, experts duly caution the authorities.

Considering the bugle of caution sounded out by the International Monetary Fund (IMF) in its revised world economic outlook that the financial strains on oil exporters and the deep investment cutbacks in the industry are more than neutralising the expected gains from cheap oils enjoyed by western nations, oil-importing emerging economy like India with much expectations from remittances revenue from expatriate diaspora of India, cannot get lulled into a false sense of smugness. The fall in oil price windfall should not turn out to be a factor for the downfall of global economy in general and emerging economies like India in particular.