Can Russian Oil Insulate India From Energy Crisis? – Analysis

Oil is the second biggest energy source for India, accounting for 29 percent of total energy in the country. The notable feature of the oil energy is that while all other energies are indigenously sourced, oil is an import based energy. Nearly 90 percent of crude oil is imported. Of this, over 58 percent of crude oil is imported from OPEC countries, such as Iraq, Saudi Arab, UAE  and Kuwait. Recently, the USA also emerged a major supplier of oil to India. 

Although Russia is the second largest exporter of oil in the world market and India and Russia has an eternal political hobnob, with Russia being the largest defence supplier, oil imports from Russia is meagre. Only 2 percent of oil is imported from Russia. However, the situation has changed since the start of the Ukraine war. Oil imports from Russia sparked up and reached nearly 14 percent during the first quarter of 2022-23 (April-June).  

Given this, the analysts have been bogged down in various assumptive forecasts over the dependence on Russia for the future oil energy in India. Should India shift to Russia for its major oil supply and could it sustain the flow from Russia for a longer period? Even though Russia will face a glut with several sanctions and offer incentives, such as discounted oil prices, will be it be feasible to depend on Russia for oil energy? 

There are several hinges to import oil from Russia after the sanctions. Come December, G-7 and  EU countries  will impose sanctions on Russian oil. The major part of the sanctions is the price cap on Russian oil. According to the consensus, the buyers of Russian oil and petroleum products will lose services of insurance, finances, brokering and navigation if the prices are above the cap. These sanctions will prohibit western tankers to move Russian oil to Europe .

The EU is the biggest importer of Russian oil. More than half of Russian crude oil exported to the world goes to the EU. Eventually, with the sanctions of G-7 and EU countries, Russia will face a glut in oil supply.

Given this, will India diversify oil imports from Russia and reap the benefits of discounted Russian oil? At present, India imports Russian oil at the discounted price, which is cheaper by 15-16 percent, according to media.

Nevertheless, the major headwind to expand import oil from Russia into India will be the sanctions against Russian oil. This is because neatly 80 percent of oil imported from Russia to India is moved by western tankers. Given the EU sanctions and price cap on oil, western tankers will be reluctant to move oil, in the wake of losng the services of  insurance, finances, brokering and navigation, if the prices are above the cap.  

This will lead to a scarcity of tankers to move Russian oil. In other words, western tankers can move only that Russian oil, which follows the price cap. This means western tankers can move Russian crude, provided the Russian discounted oil supply to India is at par or below the cap price.   

Against these backdrops, three scenarios crop up in the wake of sanctions, which will be effective from December. One, if the discounted price is below the cap price, western shippers can move the Russian oil. This will open a big opportunity for India to import cheap Russian oil. Secondly, western tankers will likely throng to India to move Russian oil for transshipment to EU and USA, escalating India to a stage of a potential platform for export to these nations, according to Ms Mercy A Kuo, Executive Vice President of Pamir Consulting, Washington, USA. Third, as the glut in Russian oil will make a major dent in the Russian economy, it will uptick India’s bargaining  power for the cheaper oil and increase imports from Russia. This will also pave the way for strengthening negotiation for Rupee payment arrangement for oil import.

Therefore, India’s import of oil is at a tipping point, which call for a consideration to diversify imports from Russia. 

In India, oil based energy is largely used for transportation and cooking gas purposes, unlike in western countries where they are used for manufacturing and heating purposes. Eventually, the oil price hike has a simmering impact on the manufacturing sector in India. A little more than one-tenth of oil based energy is used for industrial purpose, such as fuel oil, naphtha and LDO (light diesel oil). Even oil is not the main energy for electricity generation. Over 75 percent of electricity is generated from coal based thermal plants. Oil accounts for less than 2 percent of electricity power. 

As a matter fact, coal is the prime source of energy in India. The major sectors  of the economy, such as agriculture and manufacturing, depend on coal based energy. 

Further, if India is able to cling the Rupee payment arrangement, Russian oil will be a major shield to India’s oil energy conundrum.