India, the third largest crude oil importer and consumer, plans to scale up its import from the US and Africa following Saudi Arabia's decision to raise official selling price (OSP) of oil shipments to Asia in May. The action by Saudi, the world's largest crude exporter, was largely conceived as a retaliation to India's plan to cut crude imports from there.
The Modi government had asked the Saudi kingdom to increase crude production as it will reduce the demand and lower the prices. Petroleum Minister Dharmendra Pradhan earlier said that the high crude prices had been hurting the developing countries in their economic recovery from COVID-19. In response to Pradhan's demand, his Saudi counterpart Prince Abdulaziz bin Salman advised India to use the stocks of crude it bought cheaply during the price slump in 2020. Pradhan termed Abdulaziz's response as "undiplomatic".
In four and a half months, until mid-March, the Brent crude had jumped around 80 per cent to $70 a barrel. The price has moderated to $63 at present. The Modi government has been at the receiving end of the opposition's political attacks whenever the price increases above $67 a barrel, as it slingshots petrol price to Rs 100 a litre.
Reducing central taxes to control the prices of petrol, diesel and LPG is never an option as the government has been struggling to bridge the widening fiscal deficit and rising inflation. The government has pegged the fiscal deficit at Rs 18.48 lakh crore, or 9.5 per cent of GDP, for 2020-21 on account of the pandemic and subsequent disruptions. Moody's Analytics called the inflation 'uncomfortably high' and said that the core inflation rose to 5.6 per cent in February from 5.3 per cent in January.
According to sources in PSU oil companies, the ministry has instructed them to increase the import from the US and Africa because the giants in Middle East artificially jack up the prices. "We will cut the import from Saudi at least by one-third in May," said a senior executive.
Instead of the average monthly import order of 14.8 million barrels, the Indian PSU refiners have placed orders for just 9.5 million barrels of Saudi oil in May. The PSU refiners are also looking to purchase oil from Brazil's Tupi grade, Guyana's Liza oil and Norway's Johan Sverdrup for filling the shortfall.
Since India imports about 82 per cent of required crude - which cost $87 billion in 2018-19 - lower oil prices benefit the government. The Middle East accounts for 60 per cent of all oil bought by India followed by Latin America and Africa. However, because of its geographical proximity, the Middle East can supply cargoes to India in less time and at low freight rates.