Soundarrajan Karuppusamy asked: How the lowering of oil prices adversely affect India’s overall economic security? Will there be any negative impact on India’s energy security?

Shebonti Ray Dadwal replies: The lower oil prices have thus far been beneficial for India, being a major oil importing country. India is expected to save Rs. 2.14 lakh crore on its oil import bill in the Financial Year 2016. Moreover, a lower oil import bill has helped cut its current account deficit (CAD) from 4.8 per cent in 2012 to 1.6 per cent of the GDP. But this might not be the case in future. When the oil prices would increase, the CAD too will increase concurrently.

If prices remain low for an extended period, it would see less investment in exploration and development (E&D) activities of the oil companies, which would see the tightness in the oil supply market to grow, leading to rise in prices eventually.

Moreover, although an extended period of lower oil prices is beneficial now, it could create long-term concerns by increasing reliance on low-cost producers as low prices may push out higher-cost sources of supply. Given that some of the lowest-cost producers are situated in the West Asian (or the Middle East) region, it may increase India’s dependence on the region’s suppliers, thereby reversing the policy of diversification that was being pursued. Thus, growing turbulence in West Asia’s political environment could affect India’s overall energy security.

In a wider context, countries that are dependent on oil revenues, viz., Gulf countries, Russia, and some African and Latin American countries, would see their revenues falling and impacting their economies adversely. Since many of these are important trading partners of India, it may have fallout for India’s exports. It could also lead to imposition of barriers on employment for Indian expatriates.

India is exploiting current low prices by filling up its strategic oil reserves and also increasing its overseas oil and gas assets. However, in the long run, it should look at lowering its dependence on oil imports – by increasing its energy efficiency as well as looking for alternative energy resources, both for economic as well as climate change concerns.

Posted on January 08, 2016