Kremlin & Crude: India's oil bill lower but fuel bills still running high

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Russia continues to top India's list of oil importers for the second month in a row. Despite cheaper oil imports, the price at the pump is not coming down. Host Kalpana Pathak explores the economics and politics behind the fuel bill with Sanjeev Choudhary of the Economic Times and Kanwal Sibal, Former Indian Foreign Secretary. Credits: Aljazeera, WION, World Music and Hindustan Times 

This is an audio transcript of The Morning Brief podcast episode: Kremlin & Crude: India's oil bill lower but fuel bills still running high


Kalpana Pathak 0:08
It's 1962 and independent India is preparing for a battle against China. Also trying to set up its industries which are hungry for energy. But there's only one crude oil producing well located in Assam. The country looks to the Western oil majors for help, but that was in vain. Enter Russia. Between 1964 and 1967, a Russian oil exploration team mapped the Gulf around the western coast finding for India, its largest oil and gas field ever popularly known as the Bombay High it's 2022 and Russia is again hitting headlines for us, but this time as the top oil supplier to India, overtaking Iraq and Saudi Arabia. Since February when Russia invaded Ukraine, India's import bills from its old friend are up 21% It was less than 1% Till Feb. So what is energy friendship with Russia mean for India? cheaper oil and at steep discounts, allowing the government to save over 40,000 crore of rupees and imports, which is a conservative industry estimate. And what is this Hindi Russi Bhaichaara mean for you and me? Are we able to refuel our cars cheaper? Not really. For instance, in Mumbai we continue to pay 106 rupees for a liter of petrol and 94 rupees for a liter of diesel. But had the option of Russian Urus not been available to us? Would our inflation be steeper? Will oil companies be able to reduce fuel prices anytime soon? Is energy cooperation, the heart of indo Russian ties at a time when India is the third largest energy consumer and Russia the third largest energy producer? In today's episode, we seek answers to these questions with Kanwal Sibal, Former Foreign Secretary and Indian ambassador to Turkey, Egypt, France and Russia and my colleague Sanjeev Choudhary, who has been closely tracking the oil and gas space for the economic times. It's ninth of December. I'm Kalpana Pathak, from the economic times and you are listening to the morning brief.

Kalpana Pathak 2:35
Good morning Sanjeev Welcome to the Morning Brief. Thank you for your time.

Sanjeev Choudhary 2:38
Thanks Kalpana for having me on the show

Kalpana Pathak 2:41
So Sanjeev we all know that Russia is selling crude to India and China at a discounted rate. Can you help us understand if India has in effect materially benefited from the Russian oil imports and how?

Sanjeev Choudhary 2:53
Yes, we have certainly benefited as our refiners are able to import Russian oil at a discount to international benchmarks. Those discounts have however tapered over the month, the war began in February, the discount which we have availed or China has availed on Russian oil. Those discounts. In the initial days of the war were as high as $35 to international benchmarks like brand as US, UK, Canada they self sanctioned and decided to stop importing national, Russia had to sell oil to somebody, India and China of course stepped in or other stepped up and took that oil, and also enjoyed the benefits of that huge discount. So while in the initial phase, our discounts were like 10 to $15 per barrel. But after a few months, when the markets realized that even the West didn't want Russian oil to go off, the global market as it would push up home prices everywhere, including the US and Europe, more and more buyers sought Russian oil. This also narrowed our discounts to five to $6 per barrel, which is what it is actually now. So this is how it has benefited me. This is how this whole course has been and we are still gaining from Russian Oil. What is at the refiners level.

Kalpana Pathak 4:03
Here's what India's External Affairs Minister S Jaishankar said recently,

S Jaishankar 4:08
we do not ask our companies to buy Russian oil. We asked our companies to buy oil, what is the best option that they can get? Now, it depends on what the market throws up. If tomorrow the market gives us more competitive options. Again, please do understand. It's not just we buy oil from one country, we buy oil from multiple sources, but it is sensible policy to go where we get the best deal in the interests of the Indian people and that is exactly what we are trying to do.

Kalpana Pathak 4:40
Buying Russian crude at $60 per barrel and selling diesel at 140 a barrel makes a handsome earnings for the refining companies. In fact, according to analysts, petrol marketing margins are touching double digits now do you see these benefits trickling down to the retail users like you and me?

Sanjeev Choudhary 4:57
Before we get there, let's look at how prices are determined some prices are determined in India right? Well, not many people understand because Russian discounted oil is so much in news that people will often tend to get a feeling that home prices should also fall since we are importing so much of relatively cheaper oil, yes, but the fact is that home prices have remained almost static since April. And to answer why they haven't changed, let's understand how home prices are determined in the country. So, in India, oil companies are free to sell petrol and diesel at pumps at market prices. So which basically means refiners will get a price equivalent to the international price of petrol and diesel to this price, they would add the costs they incur in marketing their fuel, which means operating depot or petrol pumps or transporting fuel to this they would further add something which is called Marketing margins, their profits. And then of course, loaded will be on top of that heavy taxes by central and state governments. So, this becomes basically the retail price. So one key thing to understand here is that our pump prices are linked to international prices of those respective fuels, not off crude, crude is the headache of refiners not of consumers, for consumer important thing to look at is what international prices of petrol or diesel are, right. So what happens that when we try and link cheap Russian crude with our pump prices, then we make a mistake, irrespective of at what price refiners purchase crude, they are not bound to pass on those benefits to consumers, they are only expected to charge as much as international prices. Okay, which is what dealings cheap Russian crude with pump prices. So now, as we mentioned, that fuel prices has fallen, even fuel prices have fallen. So now there is a chance that these companies will have profit, as you mentioned in petrol, and they are in positive territory in diesel, they're still making some losses, but they have incurred losses in the past. And it has been the practice with these state companies that at times, they do not pass on international prices immediately to domestic consumers, they absorb it sometime they incur losses. And to make up for that losses. What they do is later they charge extra from consumers.

Kalpana Pathak 7:09
So as you pointed out that these companies have made losses and they need to recoup it, but oil actually is down 22% Since the month of August, and we haven't seen those benefits trickle down. Do you see that happening anytime in future?

Sanjeev Choudhary 7:23
To be honest, I don't think prices will come down in a hurry. Whenever these companies are under pressure from government keep prices static or cut prices and incur losses government allows them to recoup their losses later, which is what will happen in the months to come. So once they have recouped their losses. That is when properly you can realistically expect them to cut prices if prices are also down.

Kalpana Pathak 7:47
Sanjeev with this g7 group coming up with a cap on the Russian oil, do you see that's going to have any impact on India's buying Russian oil or for that matter, the discounting that we are able to avail of

Sanjeev Choudhary 8:01
So see, there are two three things one, the price gap, which is $60 per barrel, which has been set. So right now the price at which the Russian oil is selling in many cases is below 60. And the countries which have come together to impose that price gap are the ones which are anyway not buying Russian oil, that gap does nothing actually okay, in the sense that anyway, that price is the market price for Russian oil is below that or around that. So basically what these countries are saying is that you can continue to buy Russian oil, there is absolutely no problem. As long as you keep the price below 60. If you keep it below 60, you can avail of our services, our traders, our insurance, our financials, our shippers, insurance, and finance, all these things are not that big a concern from our refiners point of view, the biggest concern is shipping, okay, Russia probably doesn't have so much of that bigger fleet to carry its oil. So that is something to watch out for. So nobody is really certain as to what effect it will have, but definitely not going to disrupt supplies.

BG Sound 9:02
Regarding the oil cap. The impact of this is not very clear to us. Our concern is really what would it do to the stability and the affordability?

Kalpana Pathak 9:16
So if we could get cheaper oil from Russia, why didn't we tap into this earlier? This is because of the long sea route of over a month that oil tankers need to take between Russia and India, jacking up the shipping costs. Besides, Indian refiners have built their refinery substantially on the Middle East and crude, not only because of the continuous availability of crude, but also the fact that it takes only less than 20 days to receive it. But the global oil politics is fast changing. As the world economy seems headed into a recession, the West wants to ensure its winters do not get chilly with hot fuel prices.

Kalpana Pathak 10:01
Did you know Russia is among the largest investors in India's energy sector? Till 2021, it invested around $32 billion across joint projects in our country. Russian companies also helped in construction of six nuclear reactors in Tamil Nadu. So I turned to career diplomat Kanwal Sibal, who was India's ambassador to Russia between 2004 and 2007. To know how exactly India relates to Russia. Mr. Sibal, you've been Indian ambassador to Russia. So I want to ask you, is energy cooperation the only backbone to our ties with Russia?

Kanwal Sibal 10:41
No, no, on the contrary, the backbone of our ties has been the deep political understanding between the two countries from the time that Russia was the Soviet Union. And that friendship and based on trust has continued under President Putin. As you know, Russia is our biggest defense partner, even now, 60 to 70% of the equipment within the armed forces are of Russian origin, they have served us very well. In the past, we have, of course, diversify our ties, we have now a burgeoning defense relationship with the United States, which is unprecedented with Israel, and with France, and even now, even now, our major defense partner remains Russia, more importantly in some senses is the fact that it's Russia, that gave us first experience of handling their nuclear propelled somebody by leasing to us submarines, and then actively helping us build our own nuclear propelled submarine fleet. This is a kind of vital strategic partnership, which we will not have been able to obtain from other countries they've helped in our space program, and they are the only country today that is building nuclear power plants in India.

Kalpana Pathak 12:00
So the ties run deep. But Mr. Sibal if I had to focus just on the energy sector, even during your time, as Russian ambassador, you work towards India and Russia to have better fuel relations. Can you explain?

Kanwal Sibal 12:13
You know, when I was in Russia, I was pushing Russia very hard to give us more openings in the energy sector. In fact, I was using this phrase very often with those people that we need to re energize our ties with Russia, and one of the ways to re energize is to have a greater energy relationship. They gave us one opening in Sakhalin one. And after that, we were not able to achieve anything very significant. till about 10 years ago, we had we bought Imperial energy from the UK. And then again, there was a slump, we were not able to make headway, not because of the lack of political goodwill, is because the Russian energy sector was heavily tied with the West. But in recent years, there has been a remarkable remarkable change in our energy ties, in fact, in some senses our energy ties with Russia, are the strongest and I'll tell you why, quite apart from the fact that we are now starting to buy a lot of oil from Russia. But before that, we have invested about dollars 16 billion to date. In Russia's energy sector. Our ONGC videsh bharat petrol sources limited Indian Oil Corporation oil India Limited, they have invested a great deal of money in Russia Far East, in the East Siberian oil fields in Sakhalin, where one quart NEFT is a big field in which our companies have 49.9 interest. And after that, we have acquired that 29.9% interest in DasYulia yard field in Russia, and we are now looking at opportunities in the Arctic, where there are tremendous opportunities if we are given them, let's see what happens. But the fact is that we are very keen to invest more and more in Russia energy sector and this precedes the Ukraine conflict and the fact that we are buying the discounted oil from Russia,

Kalpana Pathak 14:08
Mr. Sibal, India's ONGC Videsh Partner in the Sakhalin one oil fields in Russia during your tenure. The field is regarded as a technical marvel, as hydrocarbon reserves lie below the sea that freeze during winter. Can you tell us how did that partnership come about?

Kanwal Sibal 14:24
It's because Exxon Mobil, as you know, was the one that is leading the project along with Japan. And it was through ExxonMobil that we got 20% share in Sakhalin one. In fact, that time, Russia was very starved of funds. And we gave a loan to Russia to acquire this 20% Which after they became more solvent and paid back our loan in its entirety, but it was a very successful trilateral project. And now as you know, Exxon Mobil has moved out because of US sanctions. We are keen, at least in principal to acquire ExxonMobil share but Russia has so far not taken a decision on this.

Kalpana Pathak 15:08
Alright, so are the proceedings Mr. Sibal of India going against the West to protect trade ties with Russia? I'm asking this to us specially in the light of Ukraine's Foreign Minister condemning India's Russian oil purchases as morally inappropriate.

Kanwal Sibal 15:23
Its ridiculous. I think the Ukrainians ought to be a little more diplomatic, and have a sense of propriety and a sense of proportion. It's utter nonsense if you ask me, because as our External Affairs Minister pointed out, in the joint press conference with the Foreign Minister, that European oil and gas purchases or fossil purchases from Russia, from February when the whole conflict started till November, have been six times more than India's. And they have bought in this period $50 billion worth of gas from Russia. So who's fueling Russia's treasury in continuing the war not India It is Europe itself, which is also harming Ukraine. But Ukraine should not indulge in this, in this demagoguery, unnecessarily. In any case, what has Ukraine done for us in the past, or now, or in the future, that can measure up in any way to a very critical, important relationship with Russia, because a good relationship with Russia is very vital for the structure of our foreign policy. We are buying from Russia, not because of any animosity or any lack of sympathy for Ukraine, it has nothing to do with Ukraine. It has everything to do with us and our national interest. And the fact that we are an energy hungry country, we import 85% of our energy, we have repeatedly said that because there is energy shortage in the world prices are high, we will take the best deal that is available, it is to our national advantage, it is for the welfare of our people. And since the West itself is tailoring their energy policy towards Russia, including the sanctions policy in a way that they can preserve to the maximum extent the welfare of their own people. So they can't deny that to us. And now I find happily, there's a change in tone from the west Americans, in particular, and has said that decision to buy Russia's discounted oil is India's sovereign decision. And more importantly, in some senses, that if India does not buy Russian oil, it will go to the Middle East to its traditional partners. And Europe now is actually tapping into the Middle East also. And that would have raised prices. So they're quite happy that they can continue to buy oil from the Middle East as an alternative without impacting on the oil price rise. And India can continue to buy relatively cheap oil from Russia. So it is a win win for for both sides.

Kalpana Pathak 18:01
All right. So do you think that India needs to protect its energy friendship with Russia? Or is that statement too far fetched?

Kanwal Sibal 18:08
You know, the West has tried in the last few months to browbeat India intimidate India, raise even these moral issues. If you remember that list, when she was prime minister, she adopted that phraseology. Victoria Nuland, when she came here also spoke in similar terms. So we have been directed by the West on this account, but we have stood our ground. And there is so much contradiction in the position that the West itself is taking with regard to purchase Russian oil, in fact, Germany's even buying gold from Russia. So now they have realized that pressure won't work, and that it is creating complications in our relationship in their relationship with us. And therefore they're stepped back because they're testing the ground and found that India is very robustly defending its position and logic is on the Indian side. As Jaishankar pointed out, quite rightly, that at the governmental level, there is now more understanding about India's position, but the think tanks and the media are not showing the same understanding, and they keep hammering away at this.

Kalpana Pathak 19:14
Do you think the Russian crude has benefited the common man in any way?

Kanwal Sibal 19:19
Oh, yes, of course, an increase of $1 in the price of oil adds $1 billion to our exchequer. So, if we can buy discounted oil, it eases pressures on the economy, it has various effects, whether it is pricing inflation outflow of dollars from the country. So to that extent, there are both direct and indirect beneficial impact on the economy and who benefits at the end of the day is the common man.

Kalpana Pathak 19:48
So talking of energy bill, Mr. Sibal, there has not been a consensus on what currency to trade oil in should it be ruble Euro dollar plus this rupee depreciation happening as well. How do you read that? And what do you think could be the way out here,

Kanwal Sibal 20:04
this is the difficult part, you see what the oil that Russia is supplying like is supplying to refineries in India, that is paid for in rupees. But what we are buying on the international market, so, oil trader or whatever it is Russian oil, I mean, that is being paid for in dollars. So there is a problem of payments. China and Russia are somewhat differently placed because Russia and China trade is very abundant 120 140 billion dollars. So, if they trade in yuan and rubles, then it is easier for them to balance their trade because if Russia sends oil to China, it can then buy products on consumer product from China with the money that they accumulate. In the case of India, there is a huge trade imbalance between India and Russia. If they keep accumulating rupees, then it's a bit of a problem for them, because what do they do with those rupees, but I think we are finding ways and means out we are allowing them, I think, to use those rupees for investment in India so that those accumulated sums are not just parked without earning any money. So it is a difficult issue. But ways are being found to deal with this. But I think a very satisfactory result both ways would elude us for some time.

Kalpana Pathak 21:26
India's stand that we will buy from wherever cheap oil is available is apt, especially when we need to prioritize our own energy needs. And in doing so, if we are addressing inflation and reducing our oil import bill, it's a win win. As they say, A penny saved is a penny earned. Thankfully, India is firing on all cylinders with focus on renewables and green hydrogen, hoping that by the turn of this decade, we may have reduced our oil and gas import bill substantially. I'm not sure which way our fuel bills will go. But with its efforts in renewables, India may well be on its way to becoming a net energy exporter in future. You were listening to the morning brief and this is Kalpana Pathak, signing off. Thank you, Mr. Sibil and Sanjeev for your insights. And thank you for tuning into this podcast brought to you by the economic times. Show producer Sumit Pande sound designer Indranil Bhattacherjee, executive producers Anupriya Bahadur, Anirban Chawdhery and Arijit Barman. We hope you liked this episode, do share it on your social media networks. The morning brief drops every Tuesday Thursday and Friday, and is available on Spotify, Apple podcast, Amazon and Google podcasts as well as jiosaavn. Do tune into et play our latest platform for all audio content, including the bonding brief. Have a good weekend. All clips used in this episode belong to the respective owners credits are given in the description

Transcribed by https://otter.ai


This transcript has been automatically generated. If by any chance there is an error please send the details for a correction to: themorningbrief@timesgroup.com We will do our best to make the amendment as soon as possible. 


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Despite cheaper Oil Imports Why is my fuel bill still high?

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