Rethinking gas

Topics oil market | Gas price | Coronavirus

The ongoing Covid-19 pandemic has shaken up global energy markets. Amid widespread demand destruction, the price of Brent crude oil has fallen to around $30 a barrel, and was even lower for much of the time since March. While it is possible that the prices will recover, the pandemic is only enhancing trends in the market that had previously been observed. Major producers agreed on production cuts after considerable effort and expending political capital. Even then, they have not made a great difference to the price. The structural effects of the changed oil supply dynamics have to be taken into account. The United States is now a leading oil producer. It may become the world’s largest oil exporter in just five years, given the fact that its crude oil production has increased by 160 per cent since 2008, while domestic demand has remained steady. India alone has increased its imports of US crude oil 10 times since 2017. Once the global economy moves out of its current depressed stage, the Russian imperative to force the issue over oil production will re-assert itself as well. Moscow and Riyadh agreed on production cuts only when the pandemic took hold and affected global demand; since the former is well aware that it needs a price of only $40 to balance its books while Riyadh needs a price of closer to $80 per barrel, it has every incentive to return to the fray soon. 

Given these structural changes, should the Indian government not re-examine its assumptions about the country’s energy mix? One major strategic and economic criterion has always been a desire to use bountiful domestic reserves of coal. Oil and gas imports were seen as a dangerous drain on Indian foreign exchange resources as well as causing dependence upon a few exporters. But neither of these two latter criteria may apply to the same degree in an oil market, with more producers and structurally lower prices. Meanwhile, domestic coal resources were never going to be sufficient, given the inferior quality of the current production — many coal producers in Indonesia and Australia continue to believe that India will have import demand. In addition, many existing independent power producers are facing financial trouble; and few new plants will be built in the private sector, given the difficulties of obtaining financial closure. 

Given these concerns — as also the impact of more coal mining in densely forested tracts and on local communities in those areas, as well as the public health costs to populations near thermal power plants — it would be wise for the government to re-evaluate its energy plans. It already has ambitious renewable energy targets, and it should re-commit to those once the pandemic is over — indeed, one framework for policy should be that thermal power plants should never receive any direct or hidden subsidies greater than those received by renewable power. Second, it might be sensible to re-examine natural gas-fired combined cycle plants in particular. Natural gas is cleaner than coal or oil, and its prices will also be lower in tandem with crude oil. Till a more extensive physical pipeline system comes into being, a flexible “virtual” pipeline system that flattens tariffs for natural gas transport across various mode might be considered.


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