Global Analysis from the European Perspective. Preparing for the world of tomorrow




India cannot finance the oil it needs for its economic growth

At the beginning of the 1990s, about 65% of India’s oil demand was covered by its own production. Nowadays India’s consumption of oil, of which 80% has to be imported, is continuously growing. Due to the population growth and the resultant increase in the number of cars as well as the stagnancy in the domestic oil production, the imports of this raw material will be rising for the foreseeable future. Such a high dependence on external producers along with growing oil prices will become a significant burden on the Indian economy.

With the oil price hovering around 60 and 70 dollars per barrel, US shale on average still generates a negative cash flow. America and other producers therefore need more expensive oil. The Trump administration does whatever is in its power to raise the oil price to make America’s shale oil industry profitable. Since Trump came to office, United State’s sanctions imposed on the biggest oil producers such as Russia,1)Exxon quits some Russian joint ventures citing sanctions, Reuters 2018-02-18.Iran or Venezuela pushed up the oil price. 2)U.S. Sanctions Could Be The Final Nail In The Coffin For Venezuelan Oil, Oil Price 2018-03-01.

The renewed Iranian sanctions will not only do harm to Tehran, but also to Delhi. In terms of oil imports India has already overtaken Japan, becoming the world’s third (after China and the United States) largest oil importer. India imports oil from Saudi Arabia (20%), Iraq (16%), Iran (11%), Nigeria (11%), United Arab Emirates (9%) and Venezuela (8%), which makes up a 14% (largest) share of all imported goods.

In 2017, when the average annual price per barrel was 54 USD, India spent over 75 billion USD on oil. Taking into account this year’s increase in imports to 4 million barrels per day plus the rising prices, one can expect a higher burden on the Indian economy. Thus, an increase in the average annual price per barrel to 75 USD means that India will pay 110 billion USD per year. If the barrel reached 100 USD, the same level of imports would amount to 146 billion USD. The equivalent level of raw material delivered at USD 125 per barrel means an expenditure of 183 billion USD. As it is, India’s trade deficit already almost doubled in the fiscal year 2017-2018 to 87.2 billion dollars,3)India’s Trade Deficit Nearly Doubles To $87.2 Billion In FY18, Bloomberg 2018-04-13.with the price of oil standing on average at 57 dollars a barrel. An annual increase in the price of oil by only 1 USD will add 1.44 billion dollars to the trade deficit.

The rise in oil prices will have a very negative impact on Indian spending and will also slow down the country’s economic growth. Also China and Europe will suffer, but these highly advanced manufacturing hubs have a comfortable trade surplus. India, an impoverished, overcrowded state with a rapidly growing population, is not able to finance the energy it needs.

References   [ + ]

1. Exxon quits some Russian joint ventures citing sanctions, Reuters 2018-02-18.
2. U.S. Sanctions Could Be The Final Nail In The Coffin For Venezuelan Oil, Oil Price 2018-03-01.
3. India’s Trade Deficit Nearly Doubles To $87.2 Billion In FY18, Bloomberg 2018-04-13.

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