Rising Crude Oil Price – Is India Prepared?

World oil exploration companies used to spend around 450 billion USD annually on exploration and development. New oil fields typically require 4 to 5 years to be developed before the first drop of oil is produced.


by N.S.Venkataraman

( November 12, 2017, Chennai, Sri Lanka Guardian) The global price of crude oil has risen sharply in recent weeks.

The price of crude oil which was as high as 111.89 USD per barrel in 2011 fell to around 46.16 USD per dollar in 2015 and then further down to 47.06 USD per barrel in 2016 but has since then shown rising trend

The price of Brent crude, which was around 60 USD per barrel in late October has now touched 64 USD per barrel , which represents rise of around 40% during the last two years.

What cause for present price rise?:

A section of industry experts are of the view that the recent crude oil price upsurge has been driven primarily by political uncertainty in Saudi Arabia, which is the world’s second largest producer of oil and the tightening of supply by the Organisation of the Petroleum Exporting Countries,(OPEC) whose economy has suffered severely due to fall in the global crude price,.

However, other industry experts think that the recent price increase are due to more fundamental factors that will have long term impact.

Will the price rise persist?

It is well accepted by all experts that the sharp increase in production of shale oil in North America is the primary reason for the drop in the price in the global crude oil market in the last few years. While the OPEC is responsible for the 40% of the world oil production, shale gas drilling in North Dakota and Texas in USA have successfully taken place in several thousands of new wells, which has resulted in the shale oil production in USA jumping several fold from 0.5 million barrel per day in 2009.

While it is reported that shale oil output from North America has increased by about 25% over the past one year, the critical questions are as to how long the shale oil production in US will be sustained at the present level , apart from the question as to what will be the growth in demand for oil in the world market. These two factors will decide the global crude oil price behaviour in the coming years.

Apart from the fact that shale oil is a depleting resource in North America , there are serious environmental issues with regard to the fracking carried our for the production of shale oil in USA. Even if shale oil deposit would be available , will it be possible to extend shale gas drilling to more areas , particularly considering the adverse environmental impact is a critical question.

World oil exploration companies used to spend around 450 billion USD annually on exploration and development. New oil fields typically require 4 to 5 years to be developed before the first drop of oil is produced.

The big oil fields that were discovered decades ago would inevitably begin to deplete. This means that new oil fields have to be discovered. The big conventional oil fields that have not yet been tapped tend to be in inaccessable spots deep below the ocean, high in the Arctic or Antarctic or both. Upstream costs of developing new oil wells are rising due to rising rig rates, deeper water depths and costs of seismic technology. Several global oil and gas exploration projects have been slowed down and some have been put on hold, in recent times due to low price of the oil and consequent poor economics of oil exploration business.

In such scenario, the supply scenario for crude oil is bound to get tightened in the coming years that would inevitably lead to crude price rise.

While it would be a guestimate as to what extent the crude oil price will increase in the global market, one fact that cannot be ignored is that the production of shale oil in North America may not remain at present level all the time due to depleting resources and environmental issues. Further, with oil exploration efforts slowing down and the global consumption rising and the major oil producing countries such as OPEC ,Venezuela and others wanting to increase the price of crude oil to sustain their economy, there is definite possibility of global crude oil price increasing in the near future to the discomfort of large oil importing countries like India.

Is India prepared?

Recent increase in the price of crude oil in the global market should be a matter of high concern to Government of India and Indian industries.

With the domestic production of crude oil remaining virtually stagnant and with no likelihood significant increase in the domestic production and further, with the requirement of crude oil steadily increasing in the country, Indian economy remains highly vulnerable to the international crude oil price scenario. This is the scenario on which the government of India has no control.

A few years back, when price of crude oil increased to more than 100 U$D per barrel, Indian economy faced tremendous crisis , which may well happen once again in the case of crude oil price climbing much higher than present level.

The Indian import of crude oil which was 171.729 million tonne in 2010 – 11 has increased to 215.72 million tonne in 2016-17. The growth in the import of crude oil is likely at 7% per year in the coming years to sustain the growth of Indian economy.

While government of India has taken some steps to increase the domestic crude oil production particularly after Modi government has taken over, expectations are that any domestic crude production increase will only be marginal.

While great efforts have been putforth by Modi government to develop alternate and non conventional energy source like solar and wind power, the impact of development of non conventional energy source will not make a significant difference to the import dependence on crude oil , considering the overall energy need of the country ,

It is matter of concern that India has not taken strong and adequate steps to curtail the growth in the requirement of crude oil in the country by economizing the consumption in various ways .

As more than 75% of the Indian requirement of crude oil is met by import , sharp increase in the global price of crude oil will be a body blow for Indian economy.

It appears that India, as yet, is unprepared to face such adverse scenario and government of India seem to have no clue on the appropriate strategies to overcome such impending crisis due to the likely global crude oil price rise.

Author: Sri Lanka Guardian

Sri Lanka Guardian has been providing breaking news & views for the progressive community since 2007. We are independent and non-profit.

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