Bad news for oil-importing nations

SUDHA MAHALINGAM | DECEMBER 2011 | SOURCE: The Hindu

The recent European Union proposal to ban the import of Iranian crude is bad news for all oil-importing nations, including India. As if that is not bad enough, the United States Senate just approved sanctions on the Central Bank of Iran, a move intended to shrink Iran's oil exports and deprive the country of cash that might be channelled into its nuclear or missile programmes.

As if on cue, Brent crossed the psychological barrier of $100 a barrel as soon as the EU ban was proposed and is cruising well above that limit. With the American sanctions, the global crude price is firmly set on a northward spiral.

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Few options

India's situation is aggravated by the fact that unlike China, it has few options for diversifying its sources of supply. It will have to hark back to the Persian Gulf for imports. Other than from the Gulf region, only marginal supplies come from Nigeria and Angola currently. Bringing tankers from Latin America or Russia does not make economic sense.

Even our own oil assets in Angola and Sudan do not ship any significant quantities of their production to India. Apart from the economics involved, prior contractual commitments made by the operators of these fields come in the way.

A whole host of countries that buy Iranian crude are not too happy with the EU proposal and they have not shied away from saying so. China, which imports 5,00,000 barrels a day of Iranian oil, is already on record rejecting the proposal.

Russia, the largest oil producer in the world today, does not import any oil from anywhere. Yet its Energy Minister Sergey Shmatko has voiced the country's opposition to the move. Heavyweights OPEC and International Energy Agency are also reportedly unhappy with the proposal, while several EU members are fence-sitters. It is probably unlikely that the proposal will go through.

Nevertheless, these developments do not augur well for importers because they have the potential to send prices skyrocketing. For the last one year, oil prices have been hardening owing to a number of factors.

On the demand-side, the second half of 2010 was surprisingly buoyant, global recession notwithstanding, primarily due to a burgeoning demand in China and India. In fact, more than half of all incremental oil demand comes from just one country — China.

The U.K.-based Centre for Global Energy Studies estimates that oil demand growth, which was in the region of 2.3 million barrels a day from 2005 to 2010, is now galloping at 6.5 mbd and is expected to continue till 2015.

India's own oil demand is growing at 5.6 per cent per annum which will push the country from its current 78 per cent import dependence to 90 per cent by 2020.

Related article: Iran adds upward pressure to oil prices

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