Sushma Ramachandran

India may have to pay more for energy as a result of the Israel-Hamas war. Global oil prices have already shot up to nearly 90 dollars per barrel. In case this trend continues for the next few months, the oil import bill for the current financial year is likely to rise substantially.

Fortunately, discounts on crude being purchased from Russia are reported to have increased recently and this may help in softening the blow of higher world prices.

This country imports as much as 85 percent of its crude oil needs and is the world’s third-largest importer. It thus has to keep a close eye on international market movements. These have been extremely volatile over the past eighteen months owing to geopolitical tensions. The latest conflict in West Asia has only increased the uncertainties surrounding this critical commodity. The benchmark Brent crude is at around 90 dollars per barrel while West Texas Intermediate crude is at around 86 dollars per barrel.

Initially, there was little response to the war in oil markets as neither Israel nor Gaza are major oil producers. There is now recognition that more players could get involved in the strife while there is also potential for constraints in shipping crude through traditional West Asian channels.

The situation on the oil front was more stable before the Ukraine war erupted in February 2022.  Prices were then hovering in the region of 75 to 80 dollars per barrel. This was a level considered manageable for an emerging economy like India that imports up to 85 percent of its fuel needs. But oil markets became extremely volatile after the Ukraine war began and prices surged initially to as much as 140 dollars per barrel. These later moderated to around 100 dollars per barrel for several months.

Prices finally reached below 90 dollars per barrel by September last year. Fortunately, India had already been able to avail of discounted rates on crude supplies from Russia which came as a relief from the burden of soaring international prices. Despite the availability of crude at lower prices from Russia and subsequently from other countries like Iraq, the oil import bill ballooned from 121 billion dollars in 2021-22 to 158 billion dollars in 2022-23.

The situation appeared to ease by January this year as prices softened to reach a range of 80 to 90 dollars per barrel for several months. International oil markets, however, again turned volatile in March owing to the collapse of some banks in the U.S.

Initially, the Silicon Valley Bank in California faced a crisis and this was followed by New York-based Signature Bank. These raised contagion fears with the subsequent takeover of Swiss flagship bank Credit Suisse by another major Swiss bank, UBS. The prospect of a global financial crisis spooked oil markets which dipped from around 85 to 73 dollars within a short period.

This was a short-term phenomenon as prices returned to the range of 75 to 80 dollars per barrel right up till July. One of the major factors for the continuing softness was the persistence of recessionary trends in the major economies as well as perceptions that demand from the largest oil importer, China, would continue to be on a low key.

It was then that Saudi Arabia and Russia, the leaders of the oil cartel, the Organisation of Petroleum Exporting Countries Plus (OPEC +), decided to step in to ensure that prices were pushed to higher levels. The reasons for both were the need for greater revenues. In the case of Saudi Arabia, it has been trying to expand its reserves to develop infrastructure to meet the future challenge of reduced fossil fuel demand. Russia equally has an urgent need to garner more resources to fund the continuing war in Ukraine. To meet their needs, they launched voluntary production cuts of 1.3 million barrels per day in July and extended these in September till the end of the year. The extension was the impetus for markets to reach 12-month highs of 95 dollars per barrel.

Even this factor failed to keep prices from softening to around 80 to 85 dollars per barrel in early October on the back of reports of a recessionary phase in developed countries like the U.S. The Hamas-Israel war has yet again reversed the trend and prices are now firming up.

As is evident from the events of the last 18 months, it has become increasingly difficult to assess the outlook for international oil markets in the future. Multiple factors affect their movement. Some drivers are easier to predict like the rise in demand and overall availability of crude oil and refined products. Similarly, it is possible to project the impact of issues like the continuation of the high interest rate regime which is bound to aggravate recessionary trends in the world economy. Demand from China which is similarly a significant element, may not be as high as earlier expected given the shaky nature of its recovery.

Predictions, however, remain uncertain when geopolitical tensions come into play. Neither the Ukraine war nor the Israel-Hamas war could have been envisaged by traditional forecasting techniques. Different parameters now need to be adopted to consider the future of both the world economy and the fluctuations in energy markets. Investment banks like Goldman Sachs which are predicting that oil prices will reach 100 dollars per barrel in 2024 may need to revise their estimates for the future keeping the shifting geopolitical scenario in mind. Emerging economies like India will also have to keep a close eye on oil markets to ensure that their strategic needs are met without any undue delays.