Indian energy conglomerates, like ONGC Videsh limited, are on a buying spree of energy assets abroad more particularly in Russia. This is certainly a major achievement, as far as energy diplomacy is concerned. Recently, at the Petrotech Conference held on December 4, 2016, Prime Minister Narendra Modi also called for a “proactive foreign policy and energy diplomacy” to achieve energy security. Hope, India’s energy policy will reap maximum advantage before prices of oil rises again
2016 ended with a happy note as far as the question of fixing of oil price is concerned. After remaining historic low since 2014, the prices of oil in the global market is increasing steadily. Now, it has gone beyond 51 dollars per barrel as stated by the Organisation of the Petroleum Exporting Countries (OPEC). Further, three major developments are taking place in the global geopolitics, having an impact on the pricing of oil. First, OPEC members in Vienna meeting on November 30 took a “historic decision” to cut production of oil from next January 2017 (to the tune of 1.2 million barrels per day) to “restore oil balance” in the international market as stated by OPEC.
Second, though they took a consensus view to reduce the oil production, two energy giants of West Asia —Saudi Arabia and Iran — went for a tougher bargaining to clinch the deal. Iran wanted to keep itself aside from the decision (like the two other OPEC members Nigeria and libya got exempted from the OPEC’s decision to cut oil production because of the volatility in their respective states) citing the fact that recently it got over from the UN sanctions.
However, Iran, after a prolonged debate and with Russia’s pressure as reported, agreed to the OPEC’s decision to cut production. Finally, non-OPEC members (Russia, Kazakhstan, Brazil, etc) met with the OPEC members on December 10, and jointly decided to cut oil production to stabilise the prices, which went down quickly due to the overproduction of the crude and its supplies to the international market.
Russia, which is a non-OPEC member and suffering because of its excessive dependency on oil, has also agreed to the proposal of cutting back energy production by 3,00,000 barrels per day as quoted in various news reports.
The immediate geo-economic repercussions, however, will be on the energy prices. As it has been observed over supply of energy to the international market will have an adverse effect on pricing, which will push the energy producing states into more vulnerability.
Economic conditions of major oil producing states like Russia, Saudi Arabia, Venezuela, Nigeria, Iran and Columbia demonstrate that Saudi Arabia which had a prosperous economy till recently (because of oil boom) is paying heavy prices for its overdependence on the oil sector since 2014. As reported in local newspapers, the Saudi economy is contracting due to the fall in oil prices. Russia is also experiencing the same.
The World Bank (WB) in its report admitted that if the oil prices will not increase substantially, than the economy will shrink in the near future. The WB study shows that Moscow experienced a negative economic growth rate both in 2015 and in the first half of 2016.
If the oil prices increase along with other sectors, the WB data projected an economic growth of 1.4 and 1.8 both in 2017-18. Venezuela is another country heavily depending on oil sector to sustain its economy is facing massive financial crunch. like Moscow, since 2014, Caracas is also experiencing a negative growth and as per the WB’s study, it does not have any chance to recovery till 2018.
The stabilisation of oil prices to some extent is a positive sign for these oil economies to recover.
Rise in the prices of oil will have positive consequences for oil economies as it will help them consolidate domestic political economy and at the same time maintain a stable geopolitical order.
On the other hand, if prices of oil fall substantially then it will contribute to the phenomenon of “Rentier state” or “Dutch diseases syndrome”, as explained by analysts. In this regard, one can cite the experience of the former Soviet Union. Energy analysts are of the opinion that one major factor which contributed to the demise of the Soviet Union was the fall in the prices of oil in the international market in the mid-1980s. It has been observed that the nexus between Washington and Riyadh has brought down the prices of oil. Riyadh flooded the international market with “cheap oil” leading to Soviet Union suffering heavy financial loss.
As per the Energy Information Administration (EIA), the prices of oil varied between 11 and 20 dollars during 1985-1986. As the Soviet Union used to depend heavily on exporting oil to sustain its economy, the sliding of oil prices, contributed to its shrinking. later on, the Soviet Union collapsed. Some of these facts were aptly brought out by then acting Prime Minister of Russia late Yegor Gaidar in an interesting book titled, Collapse of an Empire: lessons for Modern Russia, published in 2007.
The informal agreement between OPEC and non-OPEC countries to cut down oil production in order to restore oil prices reflects the fact that despite ideological and geopolitical rivalries, they can join together to stabilise the geo-economic situation.
For example, the compromise reached between Iran and Saudi Arabia within the OPEC framework as well as Saudi Arabia and Russia through informal negotiation (in September this year, Riyadh and Moscow entered into an agreement to cut down oil production to steady oil prices), considered to be the strategic foes in the regional as well as global geopolitical structure, are indicators of this development.
Another interesting thing that requires closer attention is that OPEC and non-OPEC countries reached a consensus without meddling by the United States and China, both considered to be the largest consumers and importers of energy. This may contribute to the emergence of a new kind of “cooperative world order”.
Another interesting development that is taking place in the nature of geopolitics of energy security is that the United States, which took much interest in the control and distribution of energy resources during the Cold War period as well as in recent years, also is positioning itself as major exporter of oil and other petroleum products.
The surge in the US oil export took place when a law on removing restriction on “US Crude export” was enacted in December 2015. From January to May 2016, Washington exported, as the EIA says, “501,000 barrels per day” of oil. Incidentally, China considered to be one of the strategic rivals of the US in the international energy game, received oil from the latter along with Japan as the above data highlights.
The lifting of sanctions by the US for energy export can be considered as “game changer” in the energy geopolitics. Now, with the second largest producer of oil in the world it is hoped that Washington will take a calculated interest in the global energy affairs.
It is being speculated that the President-elect Donald Trump is employing an old hand in energy affairs Rex Tillerson to be the next Secretary of State. One may add here that, he once headed the energy conglomerates Exxon Mobil. He has enough experience of negotiating energy deals, especially with Moscow. Despite surplus oil productions in America, Tillerson is not going to give up the pro-active energy policy of the US though Trump’s mantra is “energy independence”.
An aggressive energy policy (to control and distribute oil resources and major choke points) particularly in the post-Soviet region, as well as in West Asia and Africa, will help Washington to demonstrate its prowess as a great power.
How these developments are going to affect IndiaIJ Since India is importing three-fourth of its oil requirement (as per the EIA data), the slump in oil prices is good news. However, the problem with India is not about price volatility but with regards to “accessibility”. The geopolitical complexities in the South Asian region, along with West Asia so also development in the Indian Ocean region, is also preventing India to ensure perennial supply of crude.
However, Indian energy conglomerates, like ONGC Videsh limited, are on a buying spree of energy assets abroad more particularly in Russia. This is certainly a major achievement, as far as energy diplomacy is concerned. Recently, at the Petrotech Conference held on December 4, 2016, Prime Minister Narendra Modi also called for a “proactive foreign policy and energy diplomacy” to achieve energy security. Hope, India’s energy policy will reap maximum advantage before prices of oil rises again.
(The author is Assistant Professor, CRCAS, School of International Studies, Jawaharlal Nehru University)