Oil, geopolitics, and climate change

Crude oil still commands its place in the fuel market, but investments in oil exploration have gone down as concerns about climate change grow

President Biden visited Israel and Saudi Arabia recently. As a Presidential candidate, he had criticized the role of the Crown Prince in Khashoggi murder and threatened to turn his country into a ‘pariah state’. The overriding compulsion for a change in this position was a sharp increase in oil prices since the outbreak of the Ukraine crisis. If the sanctions against Russian crude oil exports are to be successful, alternate supplies have to be found. Otherwise, the increase in the price would have political costs for Biden Administration in the coming Congressional elections. The petrol price at the pump has already crossed the comfort level of $ 4 per gallon to reach a US-wide average of $ 5 per barrel. Ironically, immediately after the visit, the crude price went up from $ 104.39 to $ 110.27 per barrel before settling down to $ 107.50 per barrel. The price of the Indian crude basket has gone up to $ 104.10 per barrel from $104.10 per barrel a year ago.

Crown Prince Mohammad Bin Salman mentioned in his speech at the Jeddah meeting that Saudi Arabia will increase its crude oil production to 13 million barrels per day. The current Saudi production stands at 10.6 million barrels per day according to the OPEC report. However, this increase will be brought about by 2027. Though US officials had cautioned that changes will take a few weeks, this time frame bears no relation to the immediate context. The EU sanctions against Russian crude oil exports are to go into effect by end of this year. The US Congressional elections are to take place in November. The Saudi oil minister also linked the decision to the demand-supply situation and the position of OPEC+ which includes Russia. 

The trend of increase in oil prices had begun much before the Ukraine crisis erupted in February 2022. This was partly a function of recovering global demand in the post-Pandemic phase. A longer-term factor behind price increase is the restrictive production policy followed by OPEC + group of countries. Before Biden’s visit, the production ceiling was relaxed with an increase of 6,48,000 barrels per day from July onwards, instead of 4,32,000 barrels per day decided earlier. Saudi Arabia was careful in projecting this as a collective decision of OPEC+, rather than a unilateral increase on American request. 

An increase in OPEC + production quota by 2,12,000 barrels per day cannot neutralize the loss of 3 million barrels per day of Russian crude exports if the EU ban proves effective. Its immediate effect will be trade diversion. Russia will look for alternate markets to absorb the quantities hitherto exported to the EU, while the EU countries look for non-Russian sources to meet their demand. Since global production cannot be increased on such a scale in foreseeable future, it will lead to higher prices. 

As of now, there are no secondary sanctions by the EU or the US which may affect third countries buying Russian crude. However, if the EU and UK go ahead with a ban on marine insurance for Russian crude exported through sea route, this will have an impact on third countries. Marine insurance for trade worldwide is largely controlled by a small number of European companies. This will affect not only the 3 million barrels per day going to the EU but Russia’s global exports. 

The US has been the guarantor of the Kingdom’s security in return for a promise to meet America’s oil demand. The growth of Shale oil in the USA has changed this equation.  America is no longer dependent upon Saudi oil. Shale oil has reduced the Kingdom’s market share. The old benefactor has turned into an economic competitor. 

Weather and geopolitics are twin drivers of LNG prices. LNG price spiked to $ 54.71 last year as North Sea winds dropped impacting the wind power supply to the European grid. It reached $ 84.44 per BTU in March as the Ukraine crisis erupted. Unlike oil imports, LNG imports require extensive infrastructure in terms of liquefaction and regasification plants at exporting and importing ends. The EU’s position is in terms of LNG supplies. While the EU imports 155 BCM of gas from Russia annually, the US supplies will reach 30 BCM per annum by 2030. 

The LNG prices have gone up from $ 14.59 per MMBTU to $ 38.09 per MMBTU in a year. The EU’s attempt to diversify by switching from Russian gas to LNG imports will put further upward pressure on LNG prices. India imports around 26 million tons of LNG annually. Its imports may go up in the future as the country moves towards the net zero emission stage. There is a need to explore the option of importing piped gas. There are at least three options for bringing piped gas from Iran, Oman, or UAE through a sub-sea pipeline to India. An Indian company – SAGE has done extensive preparatory work. Given our growing energy demand, both LNG and piped gas imports are needed. 

Ironically, crude oil is commanding a premium as the age of fossil fuel draws to a close. The paradox is explained by a combination of two trends. Change in consumer behavior takes time. On the other hand, the rising concerns over climate change have driven down investment in oil field exploration from $749 billion in 2014 to $350 billion in 2021. This makes it difficult to find even replacement oil on account of the decline in production in the aging fields, let alone cater to the increase in demand.

The author is India's former Ambassador to Iran and has served in Saudi Arabia and Libya. He has also been associated as Senior Advisor to OVL and Director at GAIL