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

Related Articles: Falling Oil Prices - Impact on India, Falling Crude Oil Prices - Below the $0 Mark