But as the country’s importance in the global oil market grows, risks loom
IN FEBRUARY AMERICA slapped new sanctions
on Sovcomflot, a Russian state-owned shipping firm responsible for carrying
around 15% of Russian oil exports to India. Almost immediately, Indian
importers stopped taking shipments from Sovcomflot tankers. But that did little
to stem the flow of Russian crude to India, the world’s third-biggest consumer
of oil. Deliveries increased by 6% in March, compared with February. Exporters
arranged alternative transport to India—probably through the shadow fleet that
helps them bypass sanctions. India has also bought Russian crude at prices
below the $60-per-barrel price cap imposed by the West. Taken together, these
purchases have helped make India the second-biggest importer of Russian oil,
behind China.
The immediate impact has been to help
India to meet demand at a lower cost. In 2023 nearly 90% of India’s oil
consumption was sourced from abroad. Roughly 34% of those imports came from
Russia. The discount on Russian crude has narrowed over time, from 20% at the
start of last year to around 5% in December, but it still yields significant
savings on India’s oil imports, which were worth $181bn last year, around 27%
of the country’s total import bill.
Cheaper imports have helped India’s
Bharatiya Janata Party (BJP) government. On the government’s instructions, oil
firms kept the prices of petrol and diesel unchanged in 2022, even as global
oil prices surged in the aftermath of Russia’s invasion of Ukraine. The price
freeze helped insulate India from the type of fuel inflation that ravaged
neighbouring Pakistan and Sri Lanka. Last month, with an eye on the upcoming
general election, retailers cut petrol and diesel prices for the first time
since the war began. Less costly oil has also given the BJP more fiscal room by
shrinking the fuel-subsidy bill. That has helped it extend a popular subsidy
for liquefied petroleum gas by a year.
Globally, Indian buying of Russian oil
has been important. It has helped prevent a supply crunch. India’s petroleum
ministry claims that global oil prices could have shot up by about $30-40 per
barrel were it not for India’s trade with Russia. On April 4th an American
official visiting Delhi encouraged India’s imports of discounted Russian oil,
as it was important to “keep oil supply on the market” while ensuring the
Kremlin’s profits were being hit.
India has also rewired energy markets by
processing Russian crude and shipping it back to the West. European countries
have led the enforcement of sanctions on Russia, but remain connected to
Russian oil. In 2023 they imported roughly 225,000 barrels per day (b/d) of
Indian petrol and diesel products, up from an average of 120,000 b/d in the
previous five years, according to the International Energy Agency (IEA). These
exports have boosted India’s trade balance and are another illustration of
India’s growing clout in the market. In 2023 oil-related exports were worth
$85bn, around 60% more than in 2021.
India’s influence on global oil markets
will only increase. The IEA expects India to be the single largest source of
growth in global demand between 2023 and 2030. Growth and urbanisation are
expected to drive oil consumption up by 20% by 2030, to roughly 1.2m barrels
per day, accounting for more than a third of the projected global increase. To
meet the boom in demand, Indian refineries are expected to increase processing
capacity faster than any country in the world besides China.
Much of the oil will have to come from
abroad. Production from Indian oil reserves is declining. It accounted for just
13% of the country’s supply in 2023. An import-dependent strategy is always
vulnerable to risks, such as a wider conflict in the Middle East.
Ultimately, the most powerful way to
reduce India’s oil imports is to reduce demand for the stuff itself. In last
year’s budget India allocated $2.6bn towards programmes in green sectors. But
that is a trifle compared with the $20bn annually that the Council of Energy,
Environment and Water, a think-tank, estimates is needed for India to reach
net-zero emissions by 2070, as it has promised to do. ■