In News
- With oil imports from Russia banned by the US and being phased out by the UK, crude prices are set to rise, particularly in the US and Europe and also the prices of Edible oil are going to rise creating a problem for India.
Data on Global oil market
- There are three large players in the global oil market: At 18%-19%, the US has the highest share in global output followed closely by Russia and Saudi Arabia, each with a 12% share.
- Together, these three control almost 45% of all oil.
- Russia is the world’s second-largest producer of oil as well as the second-largest exporter.
Implication of the move
- High inflation: These moves will further increase crude oil prices, which in turn will stoke inflation across the world particularly in the US and its allied nations in Europe.
- Heavy dependence: Unlike the US, Europe is heavily dependent on oil and natural gas imports from Russia.
- Supply glut: Crude oil prices have fluctuated quite sharply over the last two years. From $60 a barrel at the start of 2020, they fell to less than $20 in later 2020 owing to a supply glut in the wake of the pandemic.
- Since then, however, they have been steadily rising even before the Ukraine conflict caused them to skyrocket.
- Russia has been holding back from providing additional supplies of natural gas to Europe: As the price of gas shot up, so did the price of oil as consumers shifted from gas to oil and coal.
- Continued underinvestment in oil and gas exploration: because of the public and regulatory aversion to fossil fuels.
- There is very limited “spare capacity” within the OPEC (Organization of the Petroleum Exporting Countries): Only Saudi Arabia and UAE have spare capacity and they are refusing to play along.
- Other dimensions to this gap: such as the cost of production and quality of crude oil apart from the viability and cost of transportation.
- Unlike Russian oil, Venezuela oil has more impurities and it requires a more complex type of refineries.
- Individual country’s cost of production also plays a key role: Most new oil fields in the US produce at $40 a barrel, while those in Russia produce at around $20 and those in Saudi Arabia at around $15 a barrel.
Significance of Russian supplies
- Biggest and Cheapest: Russian supplies are not only the second-biggest, they are also the second-cheapest and of better quality than what a replacement like Venezuela may provide.
- That explains why banning Russian oil will lead to higher costs for all concerned.
Other Way Out
- Emergency: Strategic reserves are good enough only for emergencies.
- The top three countries in terms of such reserves: are the US, China and Japan.
- Supplies from countries such as Venezuela and Iran:
- Venezuela has the world’s largest oil reserves but producing oil requires more than just reserves.
- The country’s oil-producing apparatus is in disrepair partly due to the government’s mismanagement but also because of harsh US sanctions.
- Oil-producing companies are in debt and most don’t even have good quality drilling equipment.
- Iran will not increase output unless it gets the nuclear deal with the US.
- Production can be scaled up but it will take time, money and effort.
- Since individual production levels are quite low, several countries will have to come together and still they may not come anywhere close to matching the levels that Russia produces.
Dependence of the US and its European allies on Russian energy imports
- The US imports less than 10% of its energy requirement from Russia but European countries are much more heavily dependent on Russia.
- Germany
- It is not just the most-industrialized economy but also the biggest decision-maker in the EU.
- While Russia accounts for 12% of all global exports of oil, in Germany it is a much bigger player, accounting for over 40% of that country’s oil needs.
- Similarly, Germany is also hugely dependent on Russian natural gas. Germany gets 25% from natural gas again hugely imported from Russia.
Soaring edible oil prices in India
- Prices of palm oil, the most-consumed edible oil in the world, have jumped 15% this year to a record, while rival soybean oil has gained 12%, contributing to a surge in global food inflation to near all-time highs.
- India is the world’s biggest vegetable oil importer.
- India imports about 60% of its edible oil needs, leaving the country’s retail prices vulnerable to international pressures.
- It imports palm oil from Indonesia and Malaysia, soyoil from Brazil and Argentina, and sunflower oil, mainly from Russia and Ukraine.
- Mustard Oil: The country may eventually have to turn to genetically-modified rapeseed, popularly known as mustard in India, to help boost overall oilseed output.
- Mustard oil accounts for more than 10% of India’s annual cooking oil needs of 22.5 million tons.
Steps Taken
- The central government has taken steps to cool prices, including reducing import duties on palm, soybean oil and sunflower oil, and limiting inventories to prevent hoarding.
- The immediate solution is to import refined palm oil and sell through its public distribution system (PDS) at below market value.
- Duty rationalization: A rise in global rates caused domestic edible oils to surge last year, but the federal government managed to bring down prices through several measures, including duty rationalization.
- India is working on medium- to long-term plans to cut its dependence on imported edible oils.
- Longer-term options for the government include building up reserves, boosting domestic production and allowing commercial cultivation of genetically modified (GMO) oilseed crops.
- National Mission on Edible Oils-Oil Palm: India is trying to boost domestic production to overcome its dependence on imports. The government launched a $1.5 billion initiative called the National Mission on Edible Oils-Oil Palm last year to improve self-sufficiency.
Way Forward
- India should build an edible oil reserve to insulate from any price spikes.
- This will allow the government to release supply in times of shortage, to soften prices and to curb speculation trading and hoarding.
- This would be similar to what China does with its massive stockpiles of crude oil, strategic metals and farm goods.
- India’s food stockpile is focused on grains like wheat and rice, which the country produces in abundance. It hasn’t been able to replicate that with edible oils as India relies on imports for 60% of its needs.
- More land should also be diverted to grow soybeans, sunflower and rapeseed crops.
- The government will need to spend 50 billion rupees a year to boost oilseed output.
- Farmers will need to shift away from growing wheat and rice, where they’re guaranteed a minimum price for their crops.
Source: LM
