CRUDE OIL AND ENERGY SECURITY –

A CONCERN FOR INDIA

HANDOUT 3
Access to cheap energy has become essential to the functioning of modern economies. India, the world's
third largest oil importer, needs multi-pronged approach to address its energy security. The country needs
a well-coordinated approach of focused research in multi-disciplinary fields. There is no single answer to
the question of energy security. Energy security is the association between national security and the
availability of natural resources for energy consumption. Access to cheap energy has become essential to
the functioning of modern economies. Renewable energy resources and significant opportunities for energy
efficiency exist over wide geographical areas, in contrast to other energy sources, which are concentrated
in a limited number of countries. Rapid deployment of renewable energy and energy efficiency, and
technological diversification of energy sources, would result in significant energy security and economic
benefits. It is times like these when refining margins are under stress that brings out the best innovations.
Before we proceed we must know about the genesis of oil. For this you would have to read and dig out the
details. In addition should know about the following also;
• The Achnacarry Agreement signed in Scotland on 17 September1928
• The discovery of the East Texas Oil Field in the 1930s led to a boom in production that caused
prices to fall. (Must know about different types of crude oils which students should find out).
• Leading the Railroad Commission of Texas to control production
• The Commission retained de facto control of the market until the rise of OPEC in the 1970s
• The Anglo-American Petroleum Agreement of 1944
• Venezuela was first country to move towards the establishment of OPEC in 1949
• United States forced import quotas on Venezuelan and Persian Gulf oil in order to support the
Canadian and Mexican oil industries
• OPEC was set up only in 1960
• OPEC first wielded its power with the 1973 oil embargo against the United States and Western
Europe.

This rapid growth of power capacity and a subsequent rise in demand can be attributed to several factors:
 Economic growth and increasing prosperity

 Growing rate of urbanization

 Rising per capita energy consumption

 Widening access to energy in the country

Imports of crude oil in India have increased during the last decade from two-third to four-fifth of consumption,
but storage has not kept pace, worsening the situation. India needs more tank farms and pipelines to
augment its buffer stocks and buy oil when prices are low. This is important because it forms a key part of
the country’s energy security plan. Interestingly, India is the lone exception among the major oil importing
nations, which has ignored firming up an energy security plan. Since December 2006, energy ministers of
five major oil importing nations, the US, China, Japan, India and South Korea who together account for
nearly half the global consumption, have met over half a dozen times to create a joint strategy for oil
procurement. These meetings have been primarily held to persuade China and India to increase their oil
storage reserves both for national emergencies as well as for commercial purposes. This would help reduce
the immediacy of buying and dampen effects of global oil volatility. After much prodding by the US and
Japan, India started building its underground storages at Visakhapatnam in Andhra Pradesh and Mangalore
and Padur in Karnataka to store about 5.33 million tonnes (mt) of crude oil. These storages have since
become operational, but they barely cater to two weeks of oil consumption of crude. No action was taken
to build commercial tank farms like China did. In 2010, China and India had a 20 day and a seven-day
buffer stock position, respectively. Today, China has over 60 days’ stock of crude while India’s reserve
allows it just 15 days’ comfort.

This makes India overly dependent on short-term purchases and the tenders that its oil marketing
companies float are very easily manipulated by the ICE cartel at what is known as the ‘London loophole’.
As per Sandip Sen, India has played into the hands of the Swiss commodity traders such as Glencore,
Trafigura and Vitol, who along with oil majors such as BP, Shell and Total and large banks such as Morgan
Stanley, Goldman Sachs and Societe Generale form the ICE cartel at the London Commodity Exchange
and manipulate the markets of Brent, Nigerian and Dubai crude. In 1986, visionary Chinese leader Deng
Xiaoping unveiled the historic ‘State High Tech Development Plan’ prepared by scientist Wang Ganchang
and his team of engineers. The Plan was a long-term route map devised to make China a self-reliant nation
and focussed on seven core areas, including energy security.

Energy plays an important role in the national security of any given country as a fuel to power the economic
engine. Some sectors rely on energy more heavily than others; for example, the Department of Defence
relies on petroleum for approximately 77% of its energy needs. Threats to energy security include the
political instability of several energy producing countries, the manipulation of energy supplies, the
competition over energy sources, attacks on supply infrastructure, as well as accidents, natural disasters,
terrorism, and reliance on foreign countries for oil. Foreign oil supplies are vulnerable to unnatural
disruptions from in-state conflict, exporters’ interests, and non-state actors targeting the supply and
transportation of oil resources. The political and economic instability caused by war or other factors can
also prevent the proper functioning of the energy industry in a supplier country. For example, US imposing
sanctions over Iran could further raise the prices of crude oil.

The OPEC Countries control the prices. Demand is as it is, but if production decreases the prices go up. It
also depends on the geopolitical situation around the world and the politics that at times is played among
the developed, economically strong countries.

INDIAN OIL DIPLOMACY

Oil diplomacy has become an essential element of India's foreign policy. “Getting in first with exploration
contracts, negotiating bilateral, trilateral and multilateral agreements, and ensuring that our future energy
security is safeguarded ”Through diplomatic manoeuvres aimed at securing transnational pipeline routes
and overseas crude oil and natural gas in spite of tough international competition”. About 85% of India's oil
is met through imports buys around190 million tons of crude oil a year from global markets. This costs the
economy $145 billion a year. The 2014-15 budget estimated India's subsidy bill at Rs. 2.6 lakh crore, or
2.03% of gross domestic product (GDP), with oil subsidies amounting to Rs. 63,500 crore. India ranks third
at 3.7 million barrels a day and accounted for about 4.2% of global oil consumption in 2013.
India's oil import dependence will grow to 91.6 per cent by the year 2020. There is a need of economic
growth for human development, which in turn requires access to clean, convenient and reliable energy for
all

• “Diplomacy has changed and today it is about economics, trade and petroleum.”- Dr Manmohan
Singh remarked

In an oil crisis, relationships will count for more than ownership of assets

• Oil diplomacy is intended to help on a number of fronts:

• - aiding Indian companies to win deals
• - ensuring secure supply
• - laying the groundwork for cooperation
• - attracting investment and technology
• - and encouraging investment from producer countries in India's downstream sector to ensure
that they have a vested interest

QUESTIONS TO THE STUDENTS TO BE COVERED BY THEM IN THEIR PRESENTATIONS

- Genesis of Crude Oil

- What are the different types of crude oil?
- Which are OPEC Countries?
- Why Oil prices are rising? Which are the countries affected the most and why?
- After Crude then what?