Petroleum prices touched a new four -year low of $72.5 per barrel after the Organization of Petroleum Exporting Countries (OPEC) decided last week against reducing production . The 35 per cent price drop is a huge relief for India, where petroleum products comprise a third of the import bill. Cheaper oil means narrower current account and fiscal deficits, and reduced prices at the pump for consumers shopping for food-grains, vegetables, cement and steel.
Can this happy situation last? Will 2015 be the year in which high oil prices do not disadvantage India? Judging by history, it may be.
Before oil prices began to rise in 2003, a 20-year run of price stability fuelled global growth. But cheap oil killed off investments in exploration and production. OPEC gained market share, from 30 per cent of global production in 1983 to over 40 per cent by the end of 1990s.
Then the cycle turned: the lack of alternatives to OPEC and accelerating oil demand through the 1990s pushed oil prices up again to over $100 per barrel.
High oil prices revived investments in new exploration and alternatives in the last decade; both became financially rewarding. Huge oil and gas discoveries were made in Uganda, Mozambique and Brazil. From zero known oil reserves, Uganda now sits on 6.5bn barrels of oil, discovered since 2006. Mozambique has seen similar finds of natural gas.
But the largest new discoveries have come from the Americas. Brazil, already an important oil producer, has added 5bn barrels to its reserves. Argentina also has large shale oil and gas reserves. Ditto with shale gas in the US, the oil sands of Canada (reserves at 167.8bn barrels) and the Orinoco heavy crude of Venezuela (reserves of 220bn barrels). Canada and Venezuela alone account for a quarter of the world’s oil.
Technology has helped. Cheaper natural gas is now used as vehicle fuel, and the last five years has seen 80 per cent more gas-driven vehicles globally. They’re still just 2 per cent of all vehicles, but increasing. The energy efficiency focus has also paid off. The US, Japan, Germany, UK, France, Spain and Italy have cut oil consumption by 3.5m barrels per day between 2003 to 2013.
The boom-bust pattern is predictable. The oil shocks of the 1970s led to lower energy prices, which undermined exploration. After a generation, the global oil market found itself at the same spot – lacking alternatives and higher prices.
This time too, the pattern is similar, but with two new considerations:
1. China may be nearing its consumption peak. Its infrastructure build-out is complete, and growth is starting to slow. In the recently-inked US-China climate deal, it pledged to peak its emissions by 2030.
2. Renewable energy sources – sun and wind – are now large enough to dent fossil fuel demand. From 0.67 per cent in 2003, they now comprise 2 per cent of world energy supply – and will be 20 per cent of new demand over 30 years.
That means continued low and stable oil prices for at least two decades.
US speculators claim that OPEC, by keeping prices down, is sabotaging the development of US shale resources . This is unlikely. Most shale oil is produced by private companies, which can stay profitable longer than many OPEC governments can remain solvent.
Civil war and terrorism have not hit oil production or the infrastructure of major producing nations such as Iraq, Nigeria or Libya. Indeed, terrorists depend on illegal oil exports for financing their world domination objectives, and therefore they protect oil assets.
So, barring a catastrophic geopolitical event like Iran or Saudi Arabia seeing a major output disruption, oil will stay low. India’s fuel bill then, is set to fall drastically and remain there through the administration of Narendra Modi, the Indian prime minister.
Now is the time for India to build its strategic petroleum reserve – currently at a miniscule 10 days worth of oil use (compared to 90 days for OECD nations). It should also tie up contracts with emerging suppliers in North and South America, diversifying away from West Asia.
Lastly, New Delhi can invest in a more energy-efficient economy. Petroleum products in India are used for transporting goods and people. Investment in public transport and stringent standards for vehicle fuel consumption are easy to mandate. After years, a major global shift – low energy prices – has provided India an opportunity to improve energy security and shock-proof the economy.
Amit Bhandari is a fellow for energy and environment studies at Gateway House, Indian Council on Global Relations, a foreign policy think tank based in Mumbai
Source: FT Blog
Can this happy situation last? Will 2015 be the year in which high oil prices do not disadvantage India? Judging by history, it may be.
Before oil prices began to rise in 2003, a 20-year run of price stability fuelled global growth. But cheap oil killed off investments in exploration and production. OPEC gained market share, from 30 per cent of global production in 1983 to over 40 per cent by the end of 1990s.
Then the cycle turned: the lack of alternatives to OPEC and accelerating oil demand through the 1990s pushed oil prices up again to over $100 per barrel.
High oil prices revived investments in new exploration and alternatives in the last decade; both became financially rewarding. Huge oil and gas discoveries were made in Uganda, Mozambique and Brazil. From zero known oil reserves, Uganda now sits on 6.5bn barrels of oil, discovered since 2006. Mozambique has seen similar finds of natural gas.
But the largest new discoveries have come from the Americas. Brazil, already an important oil producer, has added 5bn barrels to its reserves. Argentina also has large shale oil and gas reserves. Ditto with shale gas in the US, the oil sands of Canada (reserves at 167.8bn barrels) and the Orinoco heavy crude of Venezuela (reserves of 220bn barrels). Canada and Venezuela alone account for a quarter of the world’s oil.
Technology has helped. Cheaper natural gas is now used as vehicle fuel, and the last five years has seen 80 per cent more gas-driven vehicles globally. They’re still just 2 per cent of all vehicles, but increasing. The energy efficiency focus has also paid off. The US, Japan, Germany, UK, France, Spain and Italy have cut oil consumption by 3.5m barrels per day between 2003 to 2013.
The boom-bust pattern is predictable. The oil shocks of the 1970s led to lower energy prices, which undermined exploration. After a generation, the global oil market found itself at the same spot – lacking alternatives and higher prices.
This time too, the pattern is similar, but with two new considerations:
1. China may be nearing its consumption peak. Its infrastructure build-out is complete, and growth is starting to slow. In the recently-inked US-China climate deal, it pledged to peak its emissions by 2030.
2. Renewable energy sources – sun and wind – are now large enough to dent fossil fuel demand. From 0.67 per cent in 2003, they now comprise 2 per cent of world energy supply – and will be 20 per cent of new demand over 30 years.
That means continued low and stable oil prices for at least two decades.
US speculators claim that OPEC, by keeping prices down, is sabotaging the development of US shale resources . This is unlikely. Most shale oil is produced by private companies, which can stay profitable longer than many OPEC governments can remain solvent.
Civil war and terrorism have not hit oil production or the infrastructure of major producing nations such as Iraq, Nigeria or Libya. Indeed, terrorists depend on illegal oil exports for financing their world domination objectives, and therefore they protect oil assets.
So, barring a catastrophic geopolitical event like Iran or Saudi Arabia seeing a major output disruption, oil will stay low. India’s fuel bill then, is set to fall drastically and remain there through the administration of Narendra Modi, the Indian prime minister.
Now is the time for India to build its strategic petroleum reserve – currently at a miniscule 10 days worth of oil use (compared to 90 days for OECD nations). It should also tie up contracts with emerging suppliers in North and South America, diversifying away from West Asia.
Lastly, New Delhi can invest in a more energy-efficient economy. Petroleum products in India are used for transporting goods and people. Investment in public transport and stringent standards for vehicle fuel consumption are easy to mandate. After years, a major global shift – low energy prices – has provided India an opportunity to improve energy security and shock-proof the economy.
Amit Bhandari is a fellow for energy and environment studies at Gateway House, Indian Council on Global Relations, a foreign policy think tank based in Mumbai
Source: FT Blog
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