The continuing slump in international crude oil prices is making it harder for India to cut its dependence on imports. It's a double edged sword since cheaper imports boost local consumption on one hand, and dissuade oil companies from investing in raising domestic production on the other. The combined impact of low crude prices and the depreciation in the rupee may result in a Rs 100,500-crore impacts on India's import bill along with a Rs 9,000-crore impacts on the petroleum subsidies. Subir Ghosh looks at the international oil politics and how it impacts India.
What essentially began as a game of one-upmanship between two nations has now spread so far and wide that every sector in any country which is even slightly reflective of the global economy is feeling either the pangs of it or reaping in the associated benefits. We are talking crude oil here, and the game in question is the one that is still ongoing between Saudi Arabia and the United States.
As this edition goes to the press, many speculators across the world feel oil prices would fall to $45 a barrel by October. Irrespective of whether that would have happened, certain situations are unlikely to change. It is worth taking a look at what has happened on the crude front in the last one year or so, and what kind of bearing it is likely to have on the textiles and apparel industry both worldwide and in India.
The international oil war
Global oil prices have always artificially been kept high by the Organization of Petroleum Exporting Countries (OPEC). With prices being on the higher side a few years back, there began the quest for alternatives to crude oil. The development of shale oil, mostly in the United States, started changing the equations. From being an importer, the US slowly turned into a major exporter. The shale gas industry in the US, which is not a member of OPEC, had everything going in for it - right from the high prices of crude oil to domestic industry incentives. Commercial production, therefore, was boosted.
The only hitch was that the shale oil industry was working under the assumption that global crude oil prices would always remain high. With a cost component of $60 per barrel, it was producing shale oil with a sufficient cushioning factor. At least, that's what the industry thought, till Saudi Arabia decided to take the fight right into the US camp. It kept oil production high, and believed that shale gas companies would soon go out of business if they were unable to compete with crude oil prices. The Saudi policy did have its impact: the number of wells producing shale oil dropped from 1,608 in October last year to 659 in June this year. Investments too suffered. But US oil production didn't; in fact, it went up to a 43-year-old high of 9.6 million barrel per day. Efficiencies are said to have increased dramatically in just a year.
US companies have been working feverishly to bring down drilling costs, and therefore remain competitive. So far, this counter-measure has worked: the cost for a barrel of shale oil has been substantially brought down to $40. Many analysts feel that the oil production policy will eventually backfire on Saudi Arabia. They feel that the country will go bankrupt in another two years; it has already been losing $12 billion per month because of the war of attrition that it had itself launched.