The cold reality of modern life is that more than love, crude oil makes the world go round. Crude is the raw natural resource extracted from the earth, subsequently refined into widely used products like petroleum, jet fuel and heating oils. The price of crude impacts the cost of essential goods like food and clothing – since every good that we access daily has been transported long distances.
A significant fallout of Russia’s invasion of Ukraine has been the rising cost of petroleum. Russia is the world’s largest exporter of oil products to global markets, and the second largest exporter of crude oil behind Saudi Arabia. About 60 per cent of Russia’s oil exports go to Europe and another 20 per cent to China.
In response to the invasion, Western countries, including the United States and Europe, have imposed an array of sanctions against Russia. Europe and the United States have seen the price of oil steadily rise after they reduced their purchases from Russia. Today, gasoline costs a historic high of almost $5 a gallon in the US, up almost 50 per cent since last year. President Joe Biden has been forced to consider a gas tax holiday in light of the rising discontent amongst the American public, even though taxes constitute about a third of the price of gas.
India on the other hand has chosen a different route. We are the third-largest importer and consumer of oil in the world and have increased our purchase of Russian oil to cope with rising oil prices elsewhere. This week the Wall Street Journal and the New York Times both reported on India emerging as a major buyer of Russian oil. According to the Wall Street Journal, India has increased imports of Russian crude more than 25-fold since the start of the invasion on February 24, 2022. As of June 1, 2022, India is importing an average of a million barrels a day. We are also refining crude oil or turning it into products like jet fuel and diesel and selling it to Europe and other nations. Importing Russian crude also helps us curb inflation that has been made worse by rising fuel prices. Procuring discounted Russian oil is an effort by the government to bring down prices and halt the decline in the value of the Indian rupee which has now crossed Rs 78 to the dollar – up from an average of Rs 73.93 last year.
India’s behaviour is governed by our best interest, which is the most important element of any astute foreign and economic policy. We have historically imported oil and crude from Iran, Iraq and Russia, countries that have been precariously placed either due to war and/or sanctions.
For now, Russia has been able to take the sting out of the sanctions by selling crude, oil and coal at reasonable prices in greater volumes to newer bulk buyers like India, to combat Europe trying to wean itself off Russian crude. In May, China’s imports of Russian oil rose 28 per cent. While Europe’s Russian crude purchases fell by 5,54,000 barrels a day, Asia’s consumption rose by 5,03,000 barrels. Hence Russia has not suffered a significant loss in terms of crude oil sales.
At present, the European Union has imposed a partial embargo on the purchase and import of Russian oil. However, the West plans to introduce more comprehensive sanctions. The sanctions announced include a ban on seaborne import of Russian crude oil by December 5, 2022, and a ban on petroleum product imports as of February 5, 2023. The European Union has also announced a ban against insuring ships carrying Russian oil, to commence this December. Countries like India, China and Turkey that are increasing their oil purchases from Russia have six months to find a work-around to the insurance ban by using non-European insurance companies. As the Wall Street Journal reports, European companies own most of the ships carrying Russian oil to India. These insurance sanctions will impact the companies that own these ships as well. It remains to be seen what impact all of this will have on both the global economy in general and the Russian economy in particular.
While we await the full impact of the sanctions on Russian crude, one must consider the changed global realpolitik. China has risen as a superpower, while the two Cold War powerhouses, Russia and the United States, have been dramatically altered. Some might say they are in decline. The United States faces deep social divisions within the country and may be entering a recession. While Russia has been able to absorb the impact of these sanctions for now, it is unclear how it will weather the full force of the response package planned by the West.
However, this ability to buy cheap Russian crude may only be a temporary solution to our long-term fuel needs. Apart from geopolitical changes in the world indicating the rise of China, there is…