The past decade has seen an economic transformation in India; from the tenth spot in 2013, India is now the fifth largest economy in the world. From USD 1.86 trillion in 2013, the Indian economy has grown to USD 3.73 trillion in 2023[1]. The COVID-19 pandemic shock is now in the rear-view mirror, and the World Bank has projected strong GDP growth for 2024 and 2025[2]. This growth can also be seen in metrics such as automobile sales, energy consumption, and other metrics.
India is now the third-largest consumer of oil and the only major consumer with growing demand. It is also projected to be the largest driver of global oil demand up to 2030 (IEA, Indian Oil Market Outlook 2030), from 5.5 million barrels per day at present to 6.6 million barrels per day. OPEC projects a much larger increase to 7.2 million barrels per day by 2030 (OPEC, World Oil Outlook 2023).
While a real manifestation of progress, India’s growing oil consumption also represents a point of vulnerability. India imports over 87% of the oil that it consumes, and this dependence is set to increase going forward. During 2022-23, India imported a total of 233 million tonnes of oil and gas at a cost of USD 144 billion. Petroleum accounts for over 25% of India’s entire import basket, and high oil prices are a perennial concern for Indian planners. The oil shocks of the 1970s caused significant economic problems in India, and high oil prices in 1991 precipitated an economic crisis, forcing India to pledge its gold reserves. The price of oil is one metric that’s continuously monitored by Indian policymakers. While the past decade has been one of moderate energy prices, there have been multiple shocks and disruptions. Managing these and benefitting from them can be seen as a key achievement of the Modi government in the oil and energy space.
Managing Sanctions
The Russia-Ukraine conflict has resulted in some of the most stringent economic sanctions being imposed on Russia by the West. European countries reduced their purchases of Russian oil and gas, instead buying oil from West Asia, pricing other consumers, such as India, out of the market. This resulted in a major commodity price shock; prices of energy commodities such as oil, natural gas, and food shot up in its aftermath. Russia is the world’s second-largest oil exporter, and blocking Russian oil from the world market would result in an oil shock worse than 1973 or 1979. India increased its oil purchases from Russia, ignoring the ill-informed Western criticism at the time. The continued flow of Russian oil via India has been an important factor in keeping energy prices stable, benefitting India and the world.
Filling up India’s Strategic Petroleum Reserves
The COVID-19 pandemic was also a major economic shock, and it briefly pushed petroleum prices into the negative in early 2020. Taking advantage of the low prices, India filled up its strategic petroleum reserves at the time—5.33 million tonnes, or about 9 days of oil consumption—saving Rs 5,000 crore in the process. The purpose of SPR is to help stabilise the market by mopping up excess supply and releasing oil when supplies are running short. Subsequently, India has also brought in the Abu Dhabi National Oil Company (Adnoc) as an investor in this reserve[3]. India plans to add another 9 million tonness of storage capacity to the SPR.
Investments from Oil-Exporting Countries
Just as India needs secure oil supplies at an affordable price, oil exporters need access to markets such as India. India’s importance to oil exporters such as Saudi Arabia, Russia, and the UAE has increased as they seek demand security. These countries are also trying to invest their oil wealth in non-energy sectors to diversify their income away from oil. Because of its strong growth, India is an increasingly attractive investment destination for oil rich countries. The Norwegian Sovereign Wealth Fund, the world’s largest, has long been an investor in India with a portfolio of $22 billion. In 2017, Russia’s national oil company Rosneft acquired India’s second-largest petroleum refinery[4]. During 2020, Saudi Arabia’s Public Investment Fund invested USD 1.5 billion in Jio Platforms[5] and USD 1.3 billion in Reliance Retail[6]. News reports suggest that the sovereign wealth funds of Saudi Arabia and the UAE are both considering setting up offices in India.
Neighbourhood Connectivity
While India imports crude petroleum, it is also an important exporter of refined petroleum products such as diesel and petrol. India’s immediate neighbours—Bangladesh, Sri Lanka, and Nepal—are all importers of petroleum products. In 2019, India completed its first cross-border oil pipeline, supplying petroleum products to Nepal[7]. The second such pipeline, with Bangladesh, was completed in 2023[8]. India is exploring a similar link with Sri Lanka. These pipelines add to the existing electricity trade that India has with Bhutan, Nepal, and Bangladesh, and can pave the way for a common energy market for South Asia.
The Way Forward
India is now one of the major factors in the world oil market; Indian oil demand is greater than that of Germany, France, and the UK combined. At a global level, demand is shifting from the West to Asia. Four of the top five importers of oil—China, India, Japan, and South Korea—are in Asia. The biggest exporters of oil—Saudi Arabia, Russia, and the United Arab Emirates—are also Asian. However, the price of oil is still set on Western exchanges (WTI and Brent), and oil continues to be traded in the US dollar. The benchmarks need to reflect the changing patterns of energy trade and energy consumption.
China has tried to pitch its currency, the Yuan, as a medium of exchange and an alternative to the US Dollar. It is the largest buyer of Russian oil and a major buyer of other Russian commodities as well. The China-Russia commodity trade shifted to the Yuan during 2022-23, to avoid the impact of Western sanctions. China continues to trade with Iran, which is also heavily sanctioned, using the Yuan. Settling trade in Yuan is possible as China is a large exporter of manufactured goods to these countries. China is also trying to promote its role in the paper trade in oil via the Shanghai International Energy Exchange. However, given China’s opaque governance, financial, and regulatory systems, global investors are unlikely to flock to China. The Chinese government has tried to deal with falling equity markets via coercion in the past; any trader who falls afoul of the government’s preferred direction of trade will be at personal risk.
Can India, with its free market economy, and transparent and well regulated markets, play a larger role in the global energy trade, especially in setting prices and rule-making? Can the Indian rupee play a larger role in international trade? Some of the building blocks are already in place; India needs to use them sharply to become a bigger player in the energy trade. India already has a commodity exchange, the MCX (Multicommodity Exchange), which has contracts that trade crude oil. However, in the absence of physical settlements, this trade is mostly speculative. MCX uses oil prices from the New York exchange for settlement, so it’s not a platform for price discovery either[9].
Can the paper trade in MCX be made a physical trade, with producers and end users utilising it for hedging and price discovery? For such a market to develop, India needs buyers and sellers of oil. With a daily oil consumption of 5 million barrels, India has plenty of buyers but few sellers. This can be remedied. India’s SPR can be opened to investors for storing crude oil; the SPR can be converted into an Exchange Traded Fund (ETF), with each unit representing a volume of oil, say 100 or 1000 barrels. This is similar to the gold ETFs that already exist in India and are traded on the bourses. The owners of these oil ETFs can use this oil as collateral to buy and sell futures and options on the MCX. This will create a class of natural sellers, and these investors can then be allowed to buy and sell futures and options on the MCX, with an option to settle the trade in physical oil at the SPR storage point. This trade can be carried out at the GIFT City, which has fewer financial regulations compared to Indian exchanges and may be a more convenient jurisdiction for foreign players, whose participation is essential if the exchange serves a larger purpose.
Since the oil is physically present in India, it is still available for use in an emergency—the original purpose of establishing the SPR. Moreover, the government is free to tie up funds to store tens of millions of barrels of oil—an amount that can easily run into billions of dollars.
For this trade to grow and for this exchange to play a meaningful role, India will need to attract oil producers and refiners. India is already a major market for national oil companies such as Aramco and Adnoc. They may be willing to sell a part of their output to traders on MCX for price discovery. Likewise, Indian refineries such as Indian Oil, Bharat Petroleum, and Hindustan Petroleum may be willing to source a part of their purchases from an Indian exchange in the interest of transparency.
Finally, this exchange can serve one other purpose—a problem that has long vexed Indian policymakers. The Indian government subsidises LPG (liquified petroleum gas) and kerosene oil, both used for cooking. In times of extreme financial shocks, such as 2005-07 and 2010-14, the government also ends up subsidising consumers of other products such as diesel and petrol. The government bears some risk from extreme volatility in oil prices, and in a perfect world, it should be able to hedge this risk on an exchange like other players. The Mexican government, which depends on oil exports, hedges the prices of its oil exports. Likewise, the Indian government could hedge the price of imports against extreme movements. However, it will be politically impossible for an Indian government to buy options on a global exchange; doing this on an Indian exchange based on Indian territory and governed by Indian law may be more doable. The last step is extremely ambitious, but it can help resolve the issue that has vexed all Indian governments from 1947 to the present day: how to protect the Indian economy from extreme price fluctuations. Making India more central to the global energy trade may help solve this riddle.
Author Brief Bio: Amit Bhandari is a Senior Fellow at Gateway House. He is the author of “India and the Changing Geopolitics of Oil (Routlege, 2021), a book that looks at India’s changing role in the global oil trade and how it can use this heft to secure energy supplies. This latter half of this article is a condensed version of the ideas presented in the Gateway House paper “Petro Dollar. Petro Yuan. Petro Rupee?” first published by GateWay House in 2019, by the same author. This paper is available at https://www.gatewayhouse.in/petro-rupee/
References:
[1]https://www.imf.org/en/Publications/WEO/weo-database/2023/October/weo-report?c=534,&s=NGDP_RPCH,NGDPD,PPPGDP,NGDPDPC,PPPPC,&sy=2021&ey=2028&ssm=0&scsm=1&scc=0&ssd=1&ssc=0&sic=0&sort=country&ds=.&br=1
[2]https://openknowledge.worldbank.org/server/api/core/bitstreams/4ec19c2d-65fd-4523-8020-338f0cb98523/content
[3]https://mopng.gov.in/en/international-cooperation/isprl
[4]https://www.rosneft.com/press/releases/item/187527/
[5]https://www.pif.gov.sa/en/news-and-insights/press-releases/2020/jio-platforms/
[6]https://www.pif.gov.sa/en/news-and-insights/press-releases/2020/reliance-retail-ventures/
[7]https://pib.gov.in/newsite/PrintRelease.aspx?relid=193109#:~:text=Prime%20Minister%20Shri%20Narendra%20Modi,in%20Nepal%20through%20video%20conference.
[8]https://pib.gov.in/PressReleaseIframePage.aspx?PRID=1908377#:~:text=Prime%20Minister%20Shri%20Narendra%20Modi,Prime%20Ministers%20in%20September%202018.
[9] https://www.mcxindia.com/docs/default-source/products/contract-specification/crude-oil/crude-oil-january-2022-contract-onwards.pdf?sfvrsn=6d6f5391_0
