Oil Politics and the theatre of absurdity
By: Resham Chhabra
Tags: Crude Oil, Petrodollar, Oil, Middle East, India

Oil politics was always a theatre of absurd and it couldn’t have become worse after the recent Israel UAE deal and President Trump getting nominated for the Nobel Peace award. What meets the eye is that this deal is an arrangement of convenience, it gives Trump something to talk of, before the Presidential election, Prime minister Netanyahu to ward off corruption charges, and UAE rulers to have the US on their side under threat of Democratic backlash. However, many believe that it’s also a realignment of the Middle East/North Africa politics, where Turkey and Qatar are on one side and UAE and Saudi on the other. Chinese investing big time in Iran makes the equation even more interesting.

In midst of all this, what is forgotten is the weakening financial power of Oil-producing nations. They have dominated world politics over many decades because of Petrodollar power. But the future appears bleak for them for many reasons. Most important of it is likely the declining demand for oil. If one has to believe Tony Seba of Stanford, Electric Vehicles are going to be the biggest disrupter. He predicts that by 2030, the demand of oil for transportation would decline by 30% and share of EVs will keep rising. To add to the misery, Covid has sort of advanced the crisis. Pandemic shaved off 30 million barrels a day of demand( broadly the output of USA, Russia, and Saudi Arabia put together ). We all know that even for Saudi Arabia any rate less than $ 80 a barrel would not support their national budget. So is the case with other oil-dependent economies. The biggest cartel of the world is finding it difficult to put its act together because of Iran getting a huge boost in form of investment from China and enough surplus in the US, the biggest consumer of Oil, from shale. To say the least, it will have a catastrophic impact on many economies but more importantly on the social fabric of countries dependent on oil money.

What is in store for India out of this current and potential crisis? It can be good as well as bad news for India. While on the economic front it’s no brainier that it will help us reduce our import bill. When the crude price tanked below $ 40, Indian Government smartly invested big money to fill up all its strategic oil storage ( 5 million tonnes +) and also entered into long term contracts. Yes, we are no match to what storage capacity China has but one believes that we have overall covered close to 90 days of nations requirement. Oil companies smartly jacked-up retail prices regularly to get revenue for the government which was otherwise struggling to meet two ends due to poor GST collections. What may come as a pleasant surprise is that low crude prices may last much longer than anticipated. While on the economic front it’s all good news, what worries me is the likely instability in the Islamic World due to potential economic crisis. On one hand, it will impact the employment market for Indians, on the other Fundamentalists will gain an upper hand in those countries. We know India will be their obvious target. We can’t rule out China acting as a catalyst.

Instead of bothering with what is not controllable, India needs to chart out its road map carefully. Developing Nonfossil based, especially renewable power generation is an obvious solution. But what will be crucial for its success is developing a Utility-scale battery storage system. Australia and the USA are front runners on this front. India must invest in its own indigenous solutions. We are land with a lot of sun and also wind but a better, more efficient, storage system will make renewable energy economically more viable. Fortunately, the capital cost of solar panels has come down drastically over the decade but so has the rate of solar power purchase. The country needs to find ways and means of getting more investment in this sector, by keeping it financially profitable. Having said that, make no mistake that usage of Oil can be avoided completely, especially in the transportation sector. As they say that cartel is born out of weakness, so we can hope that OPEC remains weak and we enjoy the benefit of low crude prices.