Oil Shock From Iran War Could Become India’s Energy Reform Moment

The closure of the Strait of Hormuz by Iran from 1 March impacted global energy markets in predictable ways. One-fifth of the world's oil passes through the Strait.Oil prices rose sharply from $70 to about $120 per barrel before falling back to about $90 per barrel. More than one-third natural gas was similarly affected. But the markets were typically slower to react. Prices rose from $2.9 per MMBTU to $3.2 and settled back to $ 3 MMBTU. Why this duality in price movement? The near instant response in oil markets is explained by deeper financialisation and trading (hedging, selling and buying) and better physical interconnectivity across markets driven by interoperability of cargos. Integrated markets respond quicker to risk but also settle down faster. In comparison gas markets are more regional than global and have long term supply contracts of up to 15 years. The structure of trade and shipping is less flexible. Liquified gas cargo is loaded months in advanced with pre-determined routes. Thus, trading is less intense. Restaurant, Hotel Bodies Warn of Widespread Shutdowns Amid Severe LPG ShortageIndia imports about 80 percent of its petroleum energy. Is that abnormal? Hardly. Think Japan and South Korea, which import all their petroleum energy. The key worry for India is the availability of natural gas. Oil is more broadly traded, and India has oil reserves of about two months. We import less than one half of our domestic demand for natural gas. More significantly, storage of natural gas is expensive because it must be deep-frozen, making India dependent on ships to pump just-in-time imports.Once a supply disruption happens, as now in the Gulf, from where the bulk of India’s natural gas is imported, only the cargos in transit, limited storage prior to regasification at terminals and the gas in the domestic pipelines remain available—together less than a fortnight's supply. Spot price cargos for immediate supply are available, but at significantly higher cost. Other rich, gas import dependent economies like the European Union, Japan and South Korea operate storage facilities for two months or more of demand, at enormous cost—well beyond India’s fiscal capacity.India is a late entrant to the use of natural gas for energy. For years, the small domestic production of natural gas was administratively allocated to manufacture fertiliser and for the extraction of cooking gas (LPG). Power generation was mostly from coal.The discovery of natural gas in the Krishna-Godavari basin resulted in expanded domestic availability. The 2008 allocation policy included city gas PNG and CNG for transport as administrative priorities. Post 2014, clean cooking and transport fuel gained prominence as climate action options, superseding the earlier priority for power generation. Unsurprisingly, built gas power generation capacity remains significantly underutilised.The government did well to prioritise the use of now scarce natural gas for PNG and CNG. Another priority is to maintain the flow of LPG cylinders as a clean cooking fuel for 329.7 million registered consumers. Consumers who use piped, pressurised natural gas for cooking are fewer and located in cities along with commercial users.Using its powers under the Essential Commodity Act 1955 (a grim reminder of the post world war years of scarcity) the government directed all refineries to prioritise the production and supply of LPG for domestic consumers over supply to commercial establishments (eateries, hotels and restaurants). Hopefully, supplementary directions to include commercial consumers will be considered to reduce business disruption albeit at a higher price.All consumers in South Asia, except in Bangladesh, which enjoys larger natural gas resources relative to population, are likely to be similarly affected. In terms of scale and dependence on imported LNG, India is the worst affected in terms of availability. But all south Asian countries will face comparable price effects from supply disruption.Governments can and should dampen the price impact on consumers for cooking fuels like PNG and LPG. Similar subsidies for CNG are appropriate and aligned with climate action. In India both the Union government and the state governments impose taxes on petroleum fuels.An external crisis is best suited to initiate deep reform. Bringing all the states together in a single national committee to determine how the fiscal impact should be managed could be a concrete step towards cooperative federalism.In 2024-25 the Union government earned Rs 3.44 trillion in tax revenue from the petroleum sector while state governments earned an additional Rs 3.25 trillion. Corporate earnings from petroleum production or sale, dividends or profit petroleum for the union government are additional.Depending on the trajectory of the war, there could be a case for using the taxes revenues on import, production and sale of petroleum fuels to contain the price impact to within a 10 percent increase in the pump price of fuels whilst absorbing the additional cost against tax revenues.A longer-term alternative could be a natural gas price stabilisation fund like Japan and South Korea, to benefit from stock market valuations in contra cyclical products, along with extended use of financial hedging instruments to reduce the draft on tax resources.India already uses long-term LNG contracts for price stability, fuel diversification in energy, and fuel substitution. The additional cost of purposeful diversification of sources for natural gas import to include the US, Australia and Russia, is a necessary expense to ensure supply resilience. This is a lesson from the Gulf war.More generally, it is time to revive the drive for privatisation of our publicly owned energy behemoths with the government retaining only a minority share, as was conceived in the early 2000s under Prime Minister Atal Behari Vajpayee. Oil and gas are legacy sectors where the private sector is more than competent to lead.Prime Minister Narendra Modi has tabled a crowded agenda for Viksit Bharat, which now includes an AI stack. Fast tracking nuclear power, pushing for higher utilisation of our wind power potential (presently just 21 percent) and continued exploitation of our solar power potential beyond 50 percent, with a complementary resilient transmission grid are foundational big-ticket investments.The public sector should lead with the domestic and foreign private sector as long term investment partners. Cooperative federalism at home must be matched by mindful plurilateral external relationships if our growth and development objectives are to be met.(Sanjeev Ahluwalia is a distinguished fellow Chintan Research Foundation and was previously in the IAS and the World Bank. This is an opinion piece and views expressed are the author's own. The Quint does not endorse or is responsible for them.)

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Iran War’s Oil Shock Could Force India’s Long-Delayed Energy Reforms

An external crisis, like the war in Iran, is best suited to initiate deep reform towards cooperative federalism.

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Topics: Oil Iran Attack LPG prices