India should not support G-7 Russian oil price cap

A country that imports more than 85% of its fuel needs must ensure that there is no disruption in the supply of this strategic product. It is therefore good news that India is trying to diversify its sources of crude oil supply. This will help insulate the country from the impact of geopolitical developments that could reduce availability at any time. Currently, the majority of crude oil purchases are made from countries in West Asia, the traditional source of supply for the past decades.

Over the past six months, however, imports from Russia have increased largely due to reduced tariffs offered to that country. Prices were well below the average Indian crude basket which was around $110 in May and $116 a barrel in June. For example, Russian bids were $16 lower in May and $14 lower in June. Reduced rates are now offset by lower offers from other countries such as Iraq.

The Indian crude basket is the weighted average of Dubai, Oman and Brent crude oil prices. This gives a better price indicator for this country, especially since most purchases are made from the West Asian region.

The net result of the cheaper prices offered by Russia is that import volumes from that country have risen from a meager 1% in February, before the conflict in Ukraine, to 18% currently. This brings Russia to third place after Saudi Arabia and Iraq.

But media reports indicate that the oil ministry wants to reduce its dependence on oil from West Asian countries, particularly Iraq, given the unstable political conditions in the region. It is therefore suggested to buy more oil from countries like Canada, Brazil, Colombia, Guyana and Gabon. The country already imports small amounts of oil from some of these countries, but this is only about 2-3% of the total import volume. Efforts are currently being made to increase these quantities so that oil imports are not blocked due to unfavorable geopolitical developments.

Diversification is also being considered in light of projections that many natural gas users will switch to oil in the near future. This would create huge demand for existing suppliers and could even crowd out India despite being a long-term buyer. It is therefore advisable to seek a variety of sources for oil imports to ensure there is no disruption in availability.

The effort is being made against the backdrop of G-7 countries seeking to induce a ceiling on Russian oil prices to prevent that country from profiting from its hydrocarbon resources. The G-7, which includes the United States, United Kingdom, Japan, Germany, France, Italy, Canada and the European Union, is keen for India to join the coalition to ensure the success of the price cap system. But there is an opinion among Western allies that even if India does not join, it will have an impact on other countries in the region.

The price cap system being considered involves participating countries denying critical services to oil cargoes priced above the limit. This could include insurance, financing, brokerage and shipping services where Western companies are primarily used for crude shipments. As for the ceiling itself, the figures mentioned are around 40 to 60 dollars per barrel.

Although the program is ambitious, the fact is that so far the economic sanctions, particularly on oil and gas, have backfired on Western allies. For example, the decision to reduce purchases of Russian oil has led to the emergence of alternative buyers such as India and China. This has also led Russia to cut gas supplies to European countries through the Nordstream-1 gas pipeline. This has been attributed to technical maintenance issues, but is clearly a response to economic sanctions. Gas supply is still ensured by older pipelines that cross Ukraine but the quantities are not sufficient for Europe.

The net result was a sharp rise in global gas prices which fueled inflationary pressures in many countries. This has led to a crisis in countries like Germany which depend up to 40% of their energy needs on Russian gas supplies. The gas shortage has also caused electricity prices to spike, as many power plants run on gas. Reports from Europe indicate that hydropower is in the doldrums due to a drought this year, while nuclear power plants in France are operating at half capacity due to technical maintenance issues.

In other words, the goal of crippling the Russian economy by imposing sanctions has instead created a situation in which Western countries themselves face a serious energy crisis. Oil and gas prices soared in the months following the conflict in Ukraine, while electricity prices also rose sharply. This is causing a lot of concern, as the demand for heating fuels will simultaneously increase in the coming winter months.

In such a scenario, it would be desirable for India to stay away from the latest Russian oil price cap plan. It should be borne in mind that even the Western coalition had carefully excluded gas supplies from the sanctions list, in order to ensure the economic well-being of European countries. Similarly, India must also keep its best interests in mind when considering such measures. Oil is a strategic commodity and policy measures must ensure sufficient availability, otherwise it could affect the country’s economic recovery process.

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