Rethinking Saudi Arabia-India Relationship in Era of Oil Abundance

Long-term energy security will continue to depend on oil from West Asia and specifically Saudi Arabia.

5 min read
Image used for representational purposes.

In 1972, Sheik Ahmed Yamani, then the oil minister of Saudi Arabia, commented to the Chairman of Exxon that “the United States cannot take an oil supply shut down”, knowing well that there was no spare capacity anywhere else in the world.

The honorable minister may not have imagined that four decades later, the rest of the world would be asking Saudi Arabia if it can take an oil demand shut down.

But a demand shut down is an exaggeration as pointed out in a recent paper co-authored by the chief economist of British Petroleum.

With More Cars, Higher Oil Demand in India

The exaggerated attention on ‘peak demand’ for oil, a point in time when demand growth for oil peaks and has started to decline, is misplaced, the authors argue, partly because the date at which oil demand will stop growing is highly uncertain and partly because even after the so called ‘peak demand’, oil demand is unlikely to fall sharply as the world would require large quantities of oil, decades after the peak.

Saudi Arabia can bet on India not only to postpone the date for ‘peak demand’ but also to underwrite robust growth in demand for oil.

India is expected to account for 30-40 percent of overall demand growth for energy in the next two decades. India’s oil demand alone is expected to increase from about 4.4 million barrels per day (mb/d) in 2016 to about 9.7 mb/d by 2040.

This increase (5.3 mb/d) is roughly half the global increase in demand of over 11 mb/d by 2040. India’s annual average growth in demand for oil estimated to be about 3.3 percent is larger than that of China (1.5 percent) and much larger than that of the world (0.5 percent).

One of the key drivers of this demand is the projected five-fold increase in the number of cars in India. While technological, macroeconomic and geo-political factors may shape the future differently, the probability of robust oil demand remains high.

India 3rd Largest Oil Importer Behind China, US

About 87 percent of India’s oil demand was met by imports in 2016-17. In the last decade (2006-16), crude oil production increased by 15 percent while consumption increased by 62 percent. This has meant growth in the share of imported energy. Energy imports accounted for over 32 percent of India’s primary energy basket in 2015.

The import of fossil fuels accounted for over 27 percent of total imports by value in 2016; out of this, oil accounted for nearly 67 percent. India is currently the third largest importer of oil behind China and the United States.

India’s oil imports from West Asia has historically accounted for over 60 percent of the total. This has hardly changed in the last two decades.

In 2001, the region accounted for 66 percent of oil imports and in 2016 it accounted for 64 percent. Among oil exports from West Asia, Saudi Arabia has historically accounted for the largest share.

In 2016-17, Saudi Arabia along with Iraq accounted for 18 percent each of India’s total imports which was the largest share.

Though the share of India’s oil imports from South America and more recently from North America have grown in the last decade, this has come at the expense of exports from Africa rather than from West Asia. Most of the projections on India’s oil imports in the next two decades show the share of West Asia increasing primarily because of favourable geography and economics.

Strengthening Oil Security

The recommendations of the recent draft on national energy policy of Niti Aayog calls for strengthening energy (oil) security through:

  1. an increase in domestic oil production
  2. diversification in sources of oil imports
  3. lowering demand for oil through efficiency

While these are standard strategies for oil (energy) security, they are unlikely to succeed to the extent expected. Based on recent trends, the prospects for a substantial increase in domestic production appears to be quite low. Diversification of supply sources does not necessarily contribute to risk reduction in an integrated global oil market.

Oil from anywhere will carry the same risk and will be available at the same price. Efficiency gains in oil use may actually increase oil demand because of the so-called ‘rebound effect’. In this light, the government’s target for reducing oil imports by 10 percent by 2022 appears optimistic.

The call to leverage India’s growing heft as a key driver of oil demand to transform India to a ‘price maker’ rather than a ‘price taker’ sounds attractive in theory, but less so in practice.

To have any influence on global crude oil prices, leave alone becoming a ‘price maker’, India must have a large trading hub for oil along with a free market that is unencumbered by State interventions. This is unlikely to materialise in the foreseeable future.

Looking at Long-Term Oil Security

As over 40 percent of India’s refining capacity is under private or joint ownership, economic rationality at the refinery level — rather than geo-political considerations at the national level — are expected to have greater influence over crude sourcing decisions.

The import of heavy sour (high sulphur) US crude comparable to West Asian sour crudes based on price arbitrage between WTI and West Asian grades illustrates this.

But such short term price arbitrage windows in the spot market cannot underwrite long term energy security, particularly oil supply security for India.

Even in the era of oil abundance, long term energy security will continue to depend largely on oil from West Asia in general, and Saudi Arabia in particular.

(The author is Head, Centre for Resources Management at the Observer Research Foundation, and has been working on policy issues in energy and climate change for over eight years. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for them.)

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