scorecardresearch
OIL ECONOMY AMID RUSSIA-UKRAINE CONFLICT

OIL ECONOMY AMID RUSSIA-UKRAINE CONFLICT

advertisement
russia russia

The annals of history bear witness to the widespread devastation that takes place when nations indulge in war. Be it the loss of lives, reduction in material wealth, or disordering of the social fabric, the spillover effects of the battlefield are felt by nations across the globe. The ongoing Russian invasion of Ukraine, supposedly the largest military attack in Europe since World War II has impaired the economy of both nations while confronting the global community with some unprecedented challenges. Forceful migration of human capital, loss in investment, damage to physical infrastructure, etc. are some of the consequences that have surfaced in Ukraine as a result of the ongoing Russian invasion. What also concerns is the flurry of economic sanctions that are imposed on Russia in the wake of its belligerent geopolitical stand. While India has maintained its neutral stance on the issue owing to its strategic ties with Russia on several fronts, the United States and other western countries have tightened their sanctions on Russia. In an inter-connected world, financial penalties imposed in one country could bear severe implications for others that are dependent on it. Amid all the geopolitical and humanitarian concerns, the effect of ongoing invasion on the oil market has also managed to keep the global economy on the edge. Russia accounts for around 14% of the global oil supply and is among the top 3 oil-producing nations. The call of pro-Ukraine nations to stop importing Russian oil, particularly when the oil-producing nation has already been putting up with economic sanctions could fuel a crisis. Globally, Russia is one of the largest crude oil exporters and unprecedented economic sanctions make it difficult to tap buyers, as it mainly exports its crude to the European refineries. Naturally, this could mean disruptions in the global oil supply and an increase in the prices of crude oil. Both Brent crude and WTI (West Texas Intermediate) futures have crossed the $100 per barrel mark for the first time in 14 years. Hopes of mutual talks and ceasefire agreement between the two nations managed to lower the prices by a narrow margin but, the entire prospect of negotiation is loomed by uncertainty and has not yield the desired results. The stand of OPEC (Oil Producing and Exporting Countries) an intergovernmental organization that is responsible for managing supplies and stabilizing oil prices on this matter has not been promising either. Despite calls to increase the supply of oil from several countries, it has maintained that the rise in prices of oil is not necessarily due to a shortage in oil and the present situation didn't require a response from the cartel group which comes as a rather cold response especially when statements issued from the IEA (International Energy Association) are to be considered. The IEA has acknowledged that Russia's appalling course of action comes at a time when the global oil markets are already tight, prices highly volatile and the economy is in a fragile stage of recovery from the widespread devastation caused by the covid19 pandemic. In a bid to stabilize the market, the IEA has agreed to release 60 million barrels of oil from their emergency reserves and tackle shortfalls in supply which come as a sigh of relief for the oil-importing nations. With the mounting pressure on OPEC from the western nations to pump more oil, the U.A.E has extended its support to the western allies and has pitched for increased output. What remains to be seen though is the stand of other OPEC members towards the whole matter. 

The war-induced proceedings will be significant for India as it is heavily reliant on oil-exporting nations for meeting its energy requirements. India has stated its intention to explore every potential to outsource its energy requirements. Leading Indian oil marketing companies have struck a deal with Russia to purchase Russian crude oil at discounted prices which is however not devoid of adjustments on the financial front. Nearly half of Russia's gold and currency reserves worldwide have been frozen and its access to global financial markets is restricted owing to economic sanctions and the removal of select Russian banks from the SWIFT payments system. Consequently, an alternative rupee-rubble trade agreement was introduced to facilitate the discounted oil deal between both nations. The deal between the Indian Oil Corporation and Russian oil companies ensured the purchase of 3 million barrels of Russian Urals crude at a discounted rate. Likewise, Hindustan Petroleum Corporation Limited bought 2 million barrels of Russian oil which highlights India’s efforts to secure crude at discounted rates.  Although ensuring energy security is of paramount importance for India as it imports more than 80% of its energy requirements, what is equally challenging is the threat of global supply chain disruption. Financial sanctions combined with supply chain disruption have dampened the demand for India’s external exports and could bear negative consequences for its imports as well in the foreseeable future. 

India is primarily dependent on crude oil to meet its energy needs. The insufficient domestic crude oil production has led to a steep rise in international imports, from 68.9 % in 2014 to 85 % in 2022. Iraq is the largest supplier of crude oil to India accounting for up to 23 % of the total imports, followed by Saudi Arabia (18 %). Despite importing only 3 % of crude oil from Russia, the recent lucrative discounted offers on crude oil might increase India's dependency on Russian supply temporarily. This imbalance in the demand-supply gap should be bridged to sustain the existing oil trade ratio among the countries. One way could be by seeing an end to the ongoing Russia-Ukraine conflict which is administered by multiple parameters, while the other a long term but sustainable way of reducing the dependency on crude oil by opting for clean or renewable energy sources. For a developing country like India, focusing on clean energy sources such as Solar, Biogas, Wind, Small hydropower, etc. could be excellent alternatives. Currently, India's 38.27 % of energy comes from clean energy sources and with the ever-increasing energy requirements, further emphasis on the domestic production of clean energy will be necessary. The recently concluded Indo-Japan Clean Energy Partnership launched during the 14th Indo-Japan Annual Summit plans to address the ambitious climate and sustainable development goals by enhancing clean energy production. Effective implementation of such plans is essential to lower the off-shore dependency and build a self-reliant system to meet future energy needs. 

 

Edited By: Admin
Published On: Apr 29, 2022