The 20 per cent spike in the benchmark Brent crude oil price on Monday in a record intra-day move is perhaps a knee-jerk reaction to the weekend drone strikes that knocked out half of Saudi Aramco’s production capacity and interrupted global crude oil supplies to the tune of 5.7 million barrels per day. With the market carrying comfortable inventories and the US immediately releasing some of its strategic petroleum reserves, immediate supply shocks to consumers from this 5 per cent dent to global output appear unlikely. But oil price trends over the medium term will be dictated by how long it takes Saudi Aramco to restore normalcy. More importantly, this episode is a sharp reminder to import-dependent countries like India that they have been unduly complacent in taking benign oil price trends for granted. In recent months, global oil markets, spooked by recession fears, had steadfastly ignored the build-up of negative geopolitical news — whether it was the end of the US’ sanction waivers on Iran or dwindling exports from Venezuela — to beat down prices below the $60-mark. But with the Saudi drone strike exposing the vulnerability of global oil infrastructure to unexpected security threats and setting off a fresh bout of tensions in West Asia, political risk premium is set to make a strong comeback into the oil pricing dynamic. India may thus have to brace for a renewed flare-up in oil that bloats its import bill, roils the rupee and re-triggers inflation in an already shaky economy.
Despite pious statements from successive governments about building strategic petroleum reserves, doubling down on domestic exploration and diversifying the import basket, India has taken ineffectual baby steps towards energy security in the past decade. After much debate, it managed to create capacities for 5.3 million tonnes of strategic petroleum reserves amounting to about 10 days’ consumption in 2018, with plans to add another 6.4 million tonnes. But this remains woefully inadequate against the global norm of 60-90 days’ reserves. Despite much lip service on attracting foreign investments, domestic oil and gas exploration remains a non-starter, with local crude output on a downward curve in recent years. Multiple policy reboots — from NELP (New Exploration and Licensing Policy) to HELP (Hydrocarbon Exploration and Licensing Policy) to Open Acreage Licensing — with changing rulebooks have muddied waters for prospective investors. The Centre’s determined raiding of the ONGC and Oil India balance sheets to fill its fiscal gap has hamstrung these PSUs in pursuing even their limited exploration efforts. Efforts to diversify India’s oil import basket have also witnessed setbacks lately, with the government giving in to US political pressure to reduce imports from traditionally economical sources such as Iran and Venezuela.
Overall, the Saudi Aramco incident is a wake-up call to Indian policymakers to work on a cohesive national policy on energy security, instead of responding with fire-fighting measures every time there’s a global oil flare-up.