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Oil in Post COVID-19 world 

  • IASbaba
  • April 7, 2020
  • 0
UPSC Articles
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INTERNATIONAL/ECONOMY

Topic: General Studies 2:

  • Effect of policies and politics of developed and developing countries on India’s interests.

Oil in Post COVID-19 world 

With COVID-19 pandemic spreading to nearly 180 countries and impacting the global economy by bringing it to near standstill combined with the recent oil-market meltdown can bring changes in Oil Sector post the crisis 

Let us have a look at possible changes and what India should do to prepare for an uncertain & contingent future 

Do You Know? 

  • Presently, the price of oil is nearly $30/bbl. which is at its lowest in a decade, and volatile downwards.  
  • The average price in 2019 was $64/bbl (Crude priceshad hit a record $147/bbl in July 2008) 
  • It is estimated that oil consumption in the current quarter will fall by approx. 25 mbd (nearly that of OPEC’s production) 

Why has Oil Prices reduced? 

The reason is two-fold. 

  • One, the Saudis have ramped up production from 9.8mbd to in excess of 12 mbd to hold on to their market share post the failure of OPEC meeting with Russia (click here for details) 
  • Two, the unprecedented COVID-induced fall in demandThe two main drivers of oil consumption — transportation and industry – have nearly stopped. 

Three consequences now hang over the petroleum market. 

1. Budgetary crisis in major oil-exporting country

  • Qatar needs an oil price of around $40/bbl to balance its fiscal activities.  
  • Algeria needs an excess of $100/bbl and Saudi Arabia requires around $80/bbl. 
  • Reduction in oil prices means lack of adequate financial resources to sustain their social and economic commitments. 
  • Even though some of these countries have abundant sovereign reserves, the long term outlook (of price rise) doesn’t look positive 
  • This means that countries have to cut back subsidies & increase taxes which may cause political unrest 
  • Impact on India: Political instability in oil supplying nations endangers our supply security 

2. The international oil industry will be reconfigured

  • Large number of companies are finding it difficult to cover their cash costs and have been forced to shut their operations 
  • Those that will survive the crisis will have substantially slimmed balance sheets and reduced valuations 
  • Exxon’s market capitalisation has, for instance, halved over the March 2020 .

3. Impact on India:  

  • International interest in divestment plans of BPCL reduces 
  • The $40-billion Ratnagiri refinery project by Saudi Aramco and UAE may be slowed down 
  • A drop in the intensity of domestic exploration. 

 4. Behaviours will shift that will deepen uncertainties.

  • Social distancing may change the dynamics of “shared mobility”.  
  • Teleporting may reduce business travel impacting oil demand 
  • Increased environmental consciousness may accelerate the push towards decarbonisation 
  • As a result, the old statistics models used in petroleum sector may not hold true for business & investment projections 

Steps that India should take to tackle the post-COVID petroleum order 

  • India should build into its oil supply plans in the likelihood of civil strife in oil producing countries. 
  • It should fill the oil caverns with strategic reserves. 
  • It should increase its imports of gas (LNG) from Australia, Africa and the US. This will reduce the political risks of dependency on oil supplies from the Middle East. 
  • Provide autonomy to Oil-PSUs, the lack of it has stifled management and operational efficiency of these companies. 
  • India should create an institutional basis for an integrated energy policy – that makes optimum use of renewable & non-renewable sources of energy 

Connecting the dots 

  • Airline industry in Post-COVID world 
  • India’s INDCs pledged in Paris deal 

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