India's Energy Options - Falling Oil Prices

What is the issue?

Amid widespread demand destruction, the price of Brent crude oil has fallen to around $30 a barrel.
The COVID-19 pandemic is only enhancing the earlier-observed trends in the market and so, India needs to assess its energy options.

What are the evolving trends in oil market?

The United States is now a leading oil producer.
It may become the world’s largest oil exporter in just 5 years.
This is aided by the fact that its crude oil production has increased by 160% since 2008.
In comparison, the domestic demand has remained steady there.
India alone has increased its imports of US crude oil 10 times since 2017.
Major global oil producers agreed on production cuts after considerable effort and expending political capital.
Russia and Saudi Arabia agreed on production cuts only when the pandemic took hold and affected global demand.
Even then, they have not made a great difference to the price.
While Riyadh needs a price of closer to $80 per barrel, Russia is well aware that it needs a price of only $40 to balance its books.
So, Russia has every incentive to return to production soon, once the global economy moves out of its current depressed stage.
Given the structural changes, the Indian government should re-examine its assumptions about the country’s energy mix.

Is coal an option?

A major strategic and economic criterion for energy has always been a desire to use bountiful domestic reserves of coal.
But domestic coal resources are never going to be sufficient, given the inferior quality of the current production.
Many coal producers in Indonesia and Australia continue to believe that India will have import demand.
In addition, many existing independent power producers are facing financial trouble.
Also, only few new plants will be built in the private sector, given the difficulties of obtaining financial closure.
There is also the impact of more coal mining in densely forested tracts and on local communities in those areas.
The public health cost to populations near thermal power plants is also a factor.

What then should India's strategy be?

The structural effects of the changed oil supply dynamics have to be taken into account.
Oil and gas imports were seen as a dangerous drain on Indian foreign exchange resources.
It has also caused a dependence upon a few exporters.
Given all these, it would be wise for the government to re-evaluate its energy plans.
It already has ambitious renewable energy targets, and it should re-commit to those once the pandemic is over.
A way could be that thermal power plants should not receive any direct or hidden subsidies greater than those received by renewable power.
It might also be sensible to re-examine natural gas-fired combined cycle plants in particular.
Natural gas is cleaner than coal or oil, and its prices will also be lower in tandem with crude oil.
Until a more extensive physical pipeline system comes into being, a flexible “virtual” pipeline system could be in place.
The idea is to flatten tariffs for natural gas transport across various modes.

Source: Business Standard