Relevance : GS Paper III
Theme of the Article
India needs to diversify its oil supplier base and increase domestic sources of energy.
Why has this Issue been Raised?
The oil market is in ferment once again with a great deal of uncertainty over supplies. Recently, the United States announced that it would not extend beyond May 1 the 180-day waiver it had granted to eight countries, including India, to purchase oil from Iran.
The price of Brent Crude
- The US announcement caused the price of Brent crude oil to witness a sudden jump as traders expected the withdrawal of the waivers to adversely affect the supply of oil in the market.
- The price of Brent crude has been rising steadily in the last few months, and has increased by almost 50% since it hit a low of about $50 in December, as a result of the decision of the Organisation of the Petroleum Exporting Countries (OPEC) to restrict their output to boost prices.
The Shale Gas Factor
The entry of U.S. shale producers into the oil market has put a lid on the price of oil as freely competing shale suppliers have been happy to increase their output whenever oil prices rise significantly.
Challenge that India Faces due to the Recent Decision
- India imports more than 10% of its crude oil from Iran, so the government faces the immediate challenge of having to find alternative suppliers to meet its huge energy needs.
- Even more worrying is the likely negative impact higher oil prices will have on India’s current account deficit, fiscal deficit and inflation in the wider economy.
- Higher oil prices also make it lucrative each time for members of OPEC to cheat on their commitments to restrict supply.
Way forward for India
- If India is to protect its interests in the ever-volatile global oil market, the government will need to take steps to diversify its supplier base and also work towards increasing domestic sources of energy supplies.
- Opening up the renewable energy sector for more investments will also help avoid over-dependence on oil from the global market to meet the country’s ever-increasing energy needs.
