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Strategic Analysis:
A Monthly Journal of the IDSA
Oil as a Factor in Indo-Gulf Relations
By Satyanarayan Pattanayak
*
Abstract
World oil demand growth in the first decade of the 21st century is projected at an annual average rate of 1.5 per cent per annum, with India and China registering the strongest growth. Considering India's growth factor, and the consequent higher oil imports from the Gulf countries, it can be a much needed respite for the Gulf countries to revive their global oil business. India is expected to account for a high global oil demand growth rate in the coming years of the 21st century. It will have to depend more heavily on its most important source of oil imports i.e. the Gulf countries, for its sustenance.
It should be noted that the search for market stability by the Gulf countries is their most important concern from the aspect of their oil export revenues. Overwhelming dependence on oil revenue by the Gulf countries has rendered them anxious to protect their earning capacity. Such earning capacity and consequent stability has now become vulnerable when most of the countries of the North are switching over to gas as their alternative source of energy. In context, Asian countries like India have become relevant for the Gulf countries, particularly due to their partially open economies and economic growth. India has now grown to depend more on oil and will become one of the major oil importers from the Gulf in the next few years. Thus, the stability of the Gulf countries can be established only with their effective cooperation with the growing major Asian oil importers, particularly India and China. In the coming years, then, efforts should be made to strengthen the interdependence and mutually beneficial relations between India and the oil exporting nations of the Gulf.
Introduction
Oil is the cheapest form of energy to move over long distances, since reserves of coal and natural gas are neither concentrated in any one region, 1 nor technically easy for transportation. Nearly two-thirds of the world's huge coal reserves are found in the USA, China and the former Soviet Union (FSU). These countries are also the main consumers and producers. The FSU possesses nearly 40 per cent of the total gas reserves of the world so far identified. 2 It is also the world's largest consumer and producer (and even exporter) of gas. The Gulf possesses nearly 30 per cent of total gas reserves, 3 but accounts for only 10 per cent of world production, and so far it has exported very little gas beyond the region. Even after two decades of expansion in the trade in coal and gas, when energy importers were reducing their dependence on oil, only about 11 per cent of coal and 17 per cent of natural gas were exported at the beginning of the Nineties. Hence, oil still accounts for three-quarters of the total volume of world trade in energy.
Despite a worldwide recession in the early 1990s and continued sluggish growth in almost all the major industrialised nations, global demand for oil has remained strong, and there is considerable consensus in the oil industry about the significant growth in demand at least for the next ten years, i.e., till 2010. At the beginning of the Nineties, the world was consuming about 65 million barrels per day (mb/d) or 3,100 million tonnes of oil a year. 4 This consumption of oil was just under 40 per cent of all the commercial energy used in the world (see Table 1 for the top 10 countries of the world, according to their total energy consumption and also their different sources of energy).
The 1992 figure of world oil demand was 67.4 mb/d. According to the International Energy Agency (IEA), world oil demand growth will accelerate as we approach 2010. For every year between 2005 and 2010, oil demand will increase by almost 1.9 mb/d on an average, compared to an average increase of just over 1mb/d per year in the 1990s. Taking the various forecasts into account, one may predict that oil is likely to remain the world's most important single source of energy for a few decades of the 21st century and probably there will be a world demand of 85 mb/d by the year 2010. 5
World oil demand growth in the first decade of the 21st century is projected at an annual average rate of 1.5 per cent per annum with India and China registering the strongest growth. 6 Oil demand increase will be strong in East Asia, especially in India, China and South Korea (see the Table 2 for the trend from 1991-98).
Table 1. World Primary Energy Consumption of Fuel, 1998 (million tonnes oil equivalent)
Country Oil Natural Coal Nuclear Hydro- Total Ranking
Gas Energy
USA 852.4 551.2 533.7 183.0 26.7 2,146.9 1
China 190.3 17.4 615.4 3.9 17.1 844.0 2
Russian Federation 122.3 328.3 102.8 26.9 13.6 593.8 3
Japan 255.0 62.5 88.4 84.0 9.3 499.2 4
Germany 136.6 71.6 84.7 41.7 1.8 336.3 5
India 86.1 20.9 153.6 2.8 7.2 270.6 6
France 94.5 33.7 15.1 100.0 5.7 249.1 7
UK 80.5 79.9 40.7 25.8 0.6 227.5 8
Canada 83.2 63..3 25.9 18.5 28.6 219.3 9
South Korea 93.3 14.1 36.1 23.1 0.5 167.1 10
Source: BP Amoco Statistical Review of World Energy, 1999, cited in Indian Petroleum and Natural Gas Statistics, 1997-98 and 1998-99, Ministry of Petroleum and Natural Gas, Government of India, New Delhi.
Table 2. Country-Wise Consumption of Oil of Top Ten Countries of the World (million tonnes/year)
Name of the
country 1991 1992 1993 1994 1995 1996 1997 1998 Ranking
USA 765.6 782.2 789.3 809.8 807.7 836.5 848.0 852.4 1
Japan 252.1 258.5 252.7 268.4 268.6 269.9 266.3 255.0 2
China 117.9 129.0 140.5 149.5 160.7 174.4 185.6 190.3 3
Germany 133.1 134.3 136.3 135.1 135.1 137.4 136.5 136.6 4
Russian
Federation 243.4 224.4 188.6 162.7 146.1 130.0 129.1 122.3 5
South Korea 59.9 72.3 79.3 87.0 94.8 101.4 110.3 93.3 6
France 94.6 94.4 91.1 88.2 89.0 91.0 91.7 93.3 7
Italy 92.4 94.5 92.6 92.5 95.5 94.2 94.7 94.7 8
India 58.9 62.1 62.7 67.4 73.0 79.4 83.3 86.1 9
Canada 74.8 74.9 77.0 78.7 76.3 78.6 82.1 83.2 10
Source: Indian Petroleum and Natural Gas Statistics, 1997-98 and 1998-99, Ministry of Petroleum and Natural Gas, Government of India, New Delhi; International Petroleum Encyclopedia, 2000 (USA: Pennwell Corporation, Library of Congress, 2000).
Presently South Korea's annual per capita energy consumption is 16.9 barrels per head. In India and China this is less than a barrel a head, though the usage of both India and China has gone up by 50 per cent and 33 per cent respectively since 1985. Assuming that the per capita consumption of both India and China rose to that of South Korea, and their populations increased at currently projected rates, these two countries alone would need a total 119 million barrels of oil a day. That is almost double the world's entire demand today. 7
Between 1992 and 2010, the oil demand of rest of the world (ROW) is projected by the IEA to grow at a furious annual average rate of 3.9 per cent per annum, considerably faster than the OECD (Organisation for Economic Cooperation and Development) countries' average of 2.4 per cent per annum and the world as a whole, which is 1.9 per cent per annum. Indeed, the OECD share of world oil demand will fall from about 59.2 per cent in 1992 to about 49.7 per cent in 2010. Over the same period, the share of ROW is expected to rise from 27.7 per cent to 39 per cent, while that of the FSU and Central/Eastern European Countries (CEE) is expected to fall from 12.9 per cent to 11.2 per cent. Some time between 2005 and 2010, non-OECD oil consumption will exceed that of the OECD. This is due to the greater weight in world oil demand of the rapidly growing non-OECD regions (see Table 3). Rapid economic growth, urbanisation and increased transportation needs all contribute to the growth in oil demand in the ROW countries. Moreover, because many of these countries lack a gas infrastructure, gas demand is expected to remain low, while energy demand will have to be met by oil and solid fuels. 8 In contrast, the oil demand growth of OECD countries will fall due to both environmental considerations that are already in place and continued efficiency improvements in all sectors. It is also expected that a move away from imported oil will be consistent with the desire to attain sensible environmental objectives. 9 Therefore, the centre of gravity of oil demand is shifting to the Asia-Pacific region (see Table 4), and this region, particularly India and China, will account for a substantial proportion of global oil demand growth in the coming years. Though some energy analysts are pessimistic about the prospects of Asia-Pacific oil demand growth because of the ongoing East Asian currency crisis, still India, along with China, can prove to be the best market for oil suppliers due to the fact that both these countries have partially open economies and both are insensitive to short-term fluctuations due to their vast populations. During the past few years, India along with China has accounted for substantial consumption of oil in Asia (see Table 5). However, this article concentrates primarily on the case of India.
Indian Oil Policy
The oil policies of oil-deficient countries have generally been guided by diverse sets of objectives. 10 The most prominent among these objectives are: enhancement of oil supplies "security", usually ascertained by reference to criteria of reliability and sufficiency of oil flows; reduction of price volatility, notably adhering to a stable price level which reflects the normal scarcity, in contrast to an "artificially constrained or monopoly price" of a given oil supply; 11 avoidance of waste through conservation, improved efficiency of energy-using equipment and building oil stockpiles for emergencies; environmental protection; minimisation of energy costs, 12 e.g. for reasons of equity considerations for the benefit of the poorer sections of society.
Table 3. World Oil Demand, 1990-1999 (mb/d)
Year 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
OECD
North America 19.3 18.6 19.0 19.2 19.8 21.6 22.3 22.7 22.9 23.8
Europe 12.8 13.4 13.6 13.6 13.8 14.6 14.9 15.0 15.2 15.2
Pacific 5.8 6.2 6.3 6.2 6.6 7.4 8.8 8.9 8.5 8.7
Total OECD 38.0 38.2 39.0 40.1 44.9 46.0 46.6 46.6 46.6 47.7
Non-OECD
Former USSR 8.8 8.3 7.1 5.7 4.9 4.8 4.4 4.3 4.3 4.0
Europe 2.4 1.4 1.3 1.3 1.1 0.7 0.7 0.8 0.8 0.8
China 1.8 2.5 2.7 3.0 3.1 3.3 3.7 4.1 4.2 4.4
Other Asia
including India 5.0 5.9 6.5 6.9 7.3 6.0 6.4 6.8 6.8 7.1
Latin America 4.9 5.4 6.5 5.7 6.0 6.0 4.3 4.5 4.7 4.9
Middle East 3.3 3.4 3.6 3.9 4.0 4.1 4.2 4.2 4.5 4.3
Africa 2.0 2.0 2.0 2.1 2.2 2.3 2.3 2.4 2.4 2.4
Total Non-
OECD 28.2 28.8 28.7 28.5 28.5 25.2 25.9 27.0 27.7 27.9
Total Demand 66.2 66.9 67.5 67.6 68.6 70.1 71.9 73.6 74.3 75.6
Source: IEA Oil Market Report (various issues); EDMC Energy Trend, (1994-1999), Institute of Energy Economics, Energy Data and Modelling Centre, Tokyo, Japan; and International Petroleum Encylopedia,2000 (USA: Pennwell Corporation, Library of Congress, 2000).
Table 4. North America and Western Europe Versus Asia-Pacific Region,1990-2000 (mb/d)
Regions 1990 1992 1994 1995 1996 1997 1998 2000
North America 19.45 19.42 20.31 20.25 20.76 20.99 21.22 21.70
Western Europe 13.27 13.77 13.80 13.93 14.20 14.47 14.74 15.31
Asia-Pacific
Region 13.70 15.26 16.85 17.88 18.97 20.02 21.36 23.55
Source: B.P.Stastical Review of World Energy,June1996, and M.G.Salemeh's projections,OPEC Review, June 1998.
Table 5. Principal Asian Oil Consumers (in 1,000 barrels per day)
Country 1990 1998 % Share of Asia
Japan 5,305 5,550 31.0
China 2,255 4,110 21.7
South Korea 1,040 2,020 12.2
India 1,210 1,820 9.5
Indonesia 645 920 5.3
Thailand 410 720 4.3
Taiwan 550 750 4.1
Singapore 390 560 3.0
Malaysia 270 405 2.3
Philippines 235 380 2.0
Pakistan 220 350 1.8
Source: International Petroleum Encyclopedia 2000 (USA: Pennwell Corporation, Library of Congress, 2000).
However, India is not worried about the objectives of these oil policies. India is solely concerned about secure oil supply flows, stable prices and minimisation of energy costs. The issues of environmental considerations and wastage are not as important for India as they are for the developed, industrialised countries, which have already lowered their dependence on oil. Moreover, oil for India is the most important source of energy to maintain and augment its economic growth.
Oil demand in relation to the rapid economic growth in India, is poised to experience sizeable growth rates in the foreseeable future, because increase in economic activity and income brought about by economic growth can expand energy requirements in various ways. In the industrial sector, increased level of production requires an increase in the use of energy as an input factor. In the household sector, income growth can bring about increased demand for energy appliances and shifts toward more energy based lifestyles, which has been actualised in the industrialised West. In addition, income growth can promote shifts in fuel use from traditional energy like fuel wood, charcoal and animal residue, to commercial energy like oil. In the transportation sector, oil demand grows as income growth brings about an increase in the number and use of vehicles. In fact, the transport sector remains the only growth sector for global oil in the industrialised world today. Thus, India like China, is one of the largest populated countries experiencing a high economic growth rate. It will require huge amounts of energy to fuel and augment its engine of economic growth. However, India (also like its Asian neighbours) has limited domestic and regional oil supplies to meet this growth in its energy requirements. This is because of factors such as limited resource base, high costs of new investment in the energy infrastructure, energy transportation bottlenecks and growing concern about environmental problems. These balances in oil demand and supply in China and India will bring about greater dependence on imported energy from outside the Asian region.
Economic Growth and Oil Consumption in India
India has achieved rapid economic growth in recent years brought about mainly by an increase in investments and exports. India and other Asian countries like China have experienced a large increase in investments in the 1980s. These countries were especially attractive to domestic and foreign capital investment because of the availability of cheap, educated and abundant labour. The large population also implied large future markets. In addition, a rapid increase in exports supports economic growth in India. It is also important to note that the economic strain emerging recently in some Asian countries, caused by excessive rapid economic growth, resulted in inflation, unequal distribution of income and infrastructural bottlenecks. But India and China, having partially open economies and persisting in strict monetary and fiscal policies, avoided the Asian crisis and maintained sizeable growth rates.
From 1986 to 1998, India's Gross Domestic Product (GDP) growth rate averaged 17.97 per cent. India's economic reforms, initiated in 1991, resulted in a higher rate of economic growth during the Eighth Five-Year Plan (1992-97) compared to the Seventh Plan. The average annual growth of GDP during the Eighth Plan was 6.8 per cent as against 6 per cent during the Seventh Plan period. The GDP growth rate averaged 7.5 per cent per annum during 1994-97. During the Ninth Plan period, the average GDP growth per annum had been pegged at 7.0 per cent. However, during the first year of the Ninth Plan (1998), there was a drop in GDP growth due to the slow progress in the agricultural and industrial sectors. In addition, apart from the rapid economic growth rate, two other factors that drive energy demand are population and proportion of urban population. 13
This higher rate of economic growth resulted in higher oil consumption. The total oil and oil products consumption of India jumped from 30.9 million tonnes in 1980-81 to 55.0 million tonnes in 1990 -91, and 89.36 million tonnes in 1998-99, as shown in Table 6.
For India, crude oil production for 1998 was 36.4 million tonnes, less than the figure of 37.1 million tonnes in 1997. 14 Due to heavy requirements of crude oil, India has managed very little export of petroleum products. In 1990, India's net imports (both crude and petroleum products) stood at 25.6 million tonnes which amounted to Rs. 8,529.86 crore. In 1997, the net imports climbed to 50.6 million tonnes amounting to a huge cost of Rs. 29,365.82 crore. In 1998, the net import further increased to 56.3 million tonnes, costing an amount of Rs. 23,828.60 crore. 15
In 1991, India was importing 448,000 barrels per day of crude oil. This increased to 680,000 barrels per day in 1998. 16 Also, India's import of refined petroleum products has increased from 203,000 barrels per day to 440,000 barrels per day. 17 Thus, while India has small proven reserves in comparison to its heavy requirements, and which will take a very long time to become productive (due to technical problems), India's demand for oil will keep growing, at least for the next decade. This demand will have to be met from outside, particularly in the current situation when the Indian oil sector is facing problems.
Table 6. Oil and Oil Product Consumption of India,1980-81 to 1998-99
(million tonnes)
Year Oil and oil products consumption
1980-81 30.90
1985-86 40.87
1990-91 55.04
1991-92 56.97
1992-93 58.90
1993-94 60.81
1994-95 65.49
1995-96 74.67
1996-97 79.16
1997-98 84.29
1998-99* 89.36
Notes: * provisional
Source: Indian Petroleum and Natural Gas Statistics,1997-98 and 1998-99, Ministry of Petroleum and Natural Gas, Government of India.
India's Oil Dependence and Import Options
The oil sector has played a critical role in meeting India's energy requirements for several decades. Prior to the discovery of oil, India's economic development was built on the twin foundations of its huge coal industry and its hydroelectric potential. This enabled the country to develop a high degree of energy self-sufficiency, although per capita energy consumption is still very low at around 12 to 15 per cent of the world average. But with economic growth gaining momentum, and the consequent energy requirements, the share of oil along with gas in the total energy consumption has increased considerably and will grow speedily in the next decade. The reasons for this are manifold. The most obvious being the persistent shortage of coal and power supplies in the past, which resulted in a switchover to petroleum products consumption. Currently, oil constitutes about 39 per cent of the total primary energy consumption in the country. This switchover took place not as a result of a large supply of petroleum products available domestically, but because of the relative ease in importing them. Thus, recognising the importance of this energy, both due to its superior quality and low environmental implications, the Government of India (GOI) has adopted several measures to increase the import of oil. Based on the heavy requirements currently, oil import requirements for India are set to increase in the first decade of the 21st century, and India will remain a net oil importer in the foreseeable future. While imports of both crude oil and refined products are needed, crude imports will be much larger than the products imports.
India is unlikely to meet the growing oil demand from the rest of the Asian countries, because in most of them-except for a few like Indonesia and Malaysia-oil production falls short of current oil demand, and demand is expected to increase rapidly in most of these countries. Proven oil reserves will also not solve the problem due to the technical problems of production and also due to growing demands. Proven crude oil reserves in the major oil producing Asian countries stood at 38.3 billion barrels at the end of January 2000 18 (see Table 7). Furthermore, the proven oil reserves of Asia, if produced at the full rate, cannot meet the high demand in Asia. It is also worth mentioning that Indonesia, the largest oil exporter in Asia, is currently poised to lose its oil export availability swiftly and is expected to become a net oil importer of oil of 0.4 mb/d in 2005. 19 This implies that India will have to resort to import of oil from outside the Asian region. International oil markets have undergone gigantic changes since their heyday between 1979 and 1981. During those three short years, the Gulf and Organisation of Petroleum Exporting Countries (OPEC) were able to attain price and revenue records and came pretty close to topping the 1977 records for production and market shares. 20 In 1979, OPEC produced close to 31mb/d-a huge 64 per cent market share-while non-OPEC nations (excluding China and the former Soviet Union) produced only 18 mb/d. The following year, OPEC oil revenue reached an all time high of about $276 billion, only to be followed by yet another record in 1981 when the average price for light crude climbed to $34/b. 21 Many things have happened since OPEC's golden days but the peaks attained at that time are yet to be surpassed. While OPEC production has recovered considerably from its nadir of about 15.5mb/d in 1985 to the current level of about 26.5mb/d in 1998, 22 international oil prices and OPEC revenue remain only a fraction of what they were in the 1979-81 period. The OPEC market share-currently estimated at about 40 per cent of the world total-continues to be 49 per cent of the global market share (i.e. including China and the FSU) achieved in 1979.
Table 7. Asia-Pacific Figures of Estimated and Actual Production of Crude Oil
Country Estimated Proven Reserves of Crude Oil Actual Production
(1,000 bbl) of Crude Oil (1,000b/d)
January 1, 1999 January 1, 2000 1999
Bangladesh 56,902 56,902 2.9
China 24,000,000 24,000,000 3,201.9
India 4,837,800 3,971,993 660.6
Indonesia 4,979,710 4,979,710 1,288.3
Malaysia 3,900,000 3,900,000 726.7
Pakistan 208,000 208,000 52.3
Philippines 289,000 228,000 0.8
Thailand 296,250 296,250 75.0
Vietnam 600,000 600,000 190.0
Myanmar(Burma) 50,000 50,000 15.0
Source: International Petroleum Encyclopedia,2000, (USA: Pennwell Corporation, Liberty of Congress 2000.)
Only a decade ago, when oil prices were hovering around $28/b, the general perception was that if OPEC allowed the price to drop temporarily to the low teens, non-OPEC producers would be decimated in a matter of a couple of years. Consequently, OPEC would reemerge with the market power it once possessed. A price war was indeed a plausible option that could force non-OPEC producers outside the US and the FSU to shut down production. North Sea producers were perceived to be particularly vulnerable to a price war. 23 Today, the real price of oil in US dollars stands at less than 30 per cent of the 1981 level, yet non-OPEC production outside the USA and the FSU continues to increase. 24 North Sea production has continued to rise and is currently almost twice its level of the early 1980s.
The most proximate reason behind the rise in non-OPEC production is the favourable conditions offered, including higher royalty payments that rise in the case of marginal fields to 70 per cent of the oil produced in a single year compared to the 30 to 40 per cent average of the past. 25 Besides, the past policy decisions of the Gulf to sell oil at very high prices also supplemented these developments.
Thus, there now remains, to a degree , a situation which reflects the establishment of energy policies which have encouraged oil production within the region that were previously heavily dependent on oil from the Gulf. The oil supply from the countries of the OECD (viz. North America ,Western Europe and Japan/Australia) 26 have now come in competition with the OPEC countries. While the OECD countries are highly industrialised, their consumption is high and production is comparatively low, so they also depend on other oil-producing countries.
Thus, the options for India can be the non-OPEC and OPEC countries. It should be noted that the increase in non-OPEC supply since the 1980s has surpassed virtually all expectations. But out of some 1,010 billion barrels of estimated global proven reserves, only 230 billion barrels (23 per cent) lies in non-OPEC countries and a significant portion of that is in high-cost areas.
Though the World Energy Outlook, 1994, of the IEA assumes that the supply of oil from outside the Gulf region will rise from its 1994 level of about 45 mb/d to 48.5 mb/d by the year 2010, the non-OPEC supply of oil may vary considerably depending on the various assumptions on oil prices, technology, taxation and environmental regulations in the producing countries. In assessing future supply from non-OPEC sources, most analysts seem to agree that the FSU is truly a wild card. 27 If all goes well in Russia and the newly independent republics around it, oil companies are likely to invest heavily in that region. However, concerns about transportation routes, conflict on the legal status of the Caspian basin, taxation on exported oil, attitudes towards foreign investment and political instability remain the major issues that constrain the flow of capital to that region. 28
Due to these policy uncertainties and other issues, the future of non-OPEC supply could fall within a broad range of projections. Under certain favourable conditions, supply from non-OPEC sources may continue to rise at a relatively robust rate and result in a production trajectory similar to that under the high case scenario. But, if price and price expectations remain similar to what we have had in recent years, and supply from the FSU is restored only moderately, then non-OPEC production may remain flat. In this scenario, it is assumed that there will be improvements in the price outlook, but no significant increase in FSU production will take place before the next decade of the 21st century. Owing to the Asian currency crisis, oil prices dipped to an all time low in 1998. Therefore, the low base case projections for non-OPEC supply hold.
Moreover, another factor constraining the non-OPEC supply is the crucial difference between the non-OPEC and Gulf reserves. The non-OPEC reserves are high cost and small resource based, thereby, with lower average reserves to production (R/p) ratio, in comparison to higher R/p ratio in the OPEC or the Gulf.
Given these limitations, it is obvious that the gap between projected global demand and non-OPEC supply is to be filled by production from the Gulf countries. On the basis of the widening gap between global oil demand and non-OPEC supply, the call on OPEC oil is expected to rise from an estimated 2.54 mb/d in 1995 to 38.6 mb/d by the year 2010. It should be noted that some three-fourths of the world's oil reserves are located in the Muslim world and some two-thirds of these resources are in the Arabian Gulf region. 29 (See Table 8 for the huge reserves of oil in the Gulf region and the position of the Gulf countries among the top ten countries of the world.)The Gulf resources will last for 50 to 150 years, the longest among the known world oil reserves and cost the least to produce. 30 Gulf oil was special. In the early days, the oil-in-place had certain characteristics which made it unique. First, the amounts of oil- in-place were huge. Furthermore, this potential became increasingly apparent after 1945 when the tentative exploration pre-War efforts moved up a gear. 31 In addition, because of the onshore location close to deep water, the size of the fields and their geology, the oil-in-place was extremely cheap to produce compared to the rest of the world. 32 Third, the Gulf oil is concentrated in one region and the central location of the Gulf, lying between the markets of East and West meant significant market opportunities. Finally, Gulf oil was special because of the concession structure of the joint ventures.
From these trends, it is obvious that the call on Gulf oil will be noteworthy. The Gulf is the only region with a higher potential to augment the global oil production, on a long-term basis. Gulf Cooperation Council (GCC) member Saudi Arabia, which has the largest reserves of oil has been able to expand its capacity from 10 mb/d in 1997- to 12 mb/d by 2000, as predicted by analysts. Kuwait has restored production to over 2 mb/d and has great potential for capacity expansion. 33 Oman, a Gulf country, is experiencing higher oil exports than before. Overall, the Gulf oil producers are able to take the plunge and can meet the required global oil demand; of the world total of 3,518.9 metric tonnes of oil production for 1998, the OPEC produced 1,480.0 metric tonnes and the Gulf produced to the tune of 1,047 metric tonnes (see Table 9).
Table 8. Estimated Proven Reserves of Oil of Top Ten Countries of the World
Estimated proven reserves of oil
Country Jan.1, 2000 Jan.1,1999
(1,000 bb1) (1,000 bbl)
Saudi Arabia 261,000,000 259,0000,000
Iraq 112,500,000 112,500,000
Kuwait 94,000,000 94,000,000
UAE 92,000,000 92,000,000
Iran 89,700,000 89,700,000
Venezuela 72,600,000 72,600,000
Russia 48,573,000 48,573,000
Libya 29,500,000 29,500,000
Mexico 28,399,000 47,822,000
China 24,000,000 24,000,000
Source: International Petroleum Encyclopedia, 2000, (USA: Pennwell Corp, Library of Congress, 2000).
Table 9. Crude Oil Production by Gulf Countries (million tonnes)
Gulf countries 1991 1992 1993 1994 1995 1996 1997 1998
Saudi Arabia 427.0 441.0 431.0 426.0 427.0 435.0 442.0 443.0
Iran 173.0 175.0 182.0 183.0 183.0 184.0 184.0 188.0
UAE 121.0 115.0 111.0 113.0 114.0 120.0 120.0 121.0
Kuwait 10.0 55.0 96.0 104.0 105.0 106.0 105.0 108.0
Iraq 14.0 26.0 23.0 25.0 27.0 30.0 58.0 105.0
Oman 36.0 37.0 39.0 41.0 43.0 45.0 45.0 45.0
Qatar 20.0 23.0 21.0 21.0 21.0 26.0 30.0 37.0
Total 801.0 872.0 903.0 913.0 920.0 946.0 984.0 1,047.0
Source: B.P. Amoco Statistical Review of World Energy, quoted in Indian Petroleum and Natural Gas Statistics, 1997-98 and 1998-99, Ministry of Petroleum and Natural Gas, Government of India, New Delhi.
Thus, the best option for India is to depend on the Gulf states. In fact, India has already adopted this option and its dependence on Gulf oil has been the maximum. But what India needs to do is to develop and maintain a very good relationship with the Gulf states for its future oil policies. India's heavy dependence of oil on Gulf states can enable the oil producers of the Gulf to take advantage of the situation in a period of worldwide oil market slump.
Increasing Import Share of the Asia-Pacific, in General, and India, in Particular, in Gulf Oil Supply
The growth in global oil demand in the past few years has increased due to the Asia-Pacific's insatiable appetite for oil to augment economic growth. In 1998, the share of the Asia-Pacific in Gulf oil imports accounted for 75 per cent and this dependence is set to increase up to 80 per cent by the end of 2005. All the forecast studies are unanimous on the projections that the Asia-Pacific, in general, and India along with China, in particular, are expected to account for a high global oil demand growth rate in the coming years of the 21st century. It is, therefore, quite clear that in the future, India will have to depend more on its important source of oil imports i.e. Gulf oil supplies (see Table 10).
However, the Asian crisis of 1998 has affected the international oil market in general and the Gulf oil suppliers in particular. The latest estimates 34 show that the oil demand of all the Asian countries, with the exception of India and China, has got dampened in the wake of the economic crisis. The oil demand of major Asian countries (South Korea, Taiwan, the Philippines, Thailand, Singapore, Indonesia, Japan, Malaysia) increased sharply till 1997, then slumped by 4 per cent from 16.88 mb/d in 1997 to 16.21 mb/d in 1998. After that, the demand has remained somewhat sluggish. As the estimates show, the oil demand of these countries may recover by the year 2001 to the levels of 1997.
India, having a partially open economy and persisting in strict and controlled monetary as well as fiscal measures was not affected by the Asian crisis and maintained its status quo in the global oil demand. India's crude oil imports, during the period January-September 1998 increased by 7 per cent over the figure of 1997.
Mutual Vulnerability and Dependability: India and the Gulf Countries
It can be argued that India's growth factor, and consequent higher oil imports, can provide the much needed respite to the Gulf countries for the revival of their global oil business. This can be substantiated by the latest estimates by the US Energy Information Administration (EIA), 35 that the major Asian economies' crude oil imports would keep growing steadily from 10.60 mb/d in 1996 to 12.58 mb/d in 2005, assuming Asia's refinery capacity would increase gradually. This implies that, to meet the incremental crude oil imports, crude oil imports from the Gulf would also grow constantly from 8.30 mb/d in 1998 to 9.48 mb/d by 2005.Thus, India along with China can be strategically significant for Gulf oil supplies.
From the perspective of the Gulf oil producing nations, on the other hand, India, China and other Asian countries appear to be promising future markets. Thus, oil supply security to these countries will be very important for the Gulf in future. And security of demand will be equally important for the Gulf oil producing nations. It should be noted that the search for market stability by the Gulf countries is their most important concern for stability. The overwhelming dependence of these countries on oil revenue has rendered them anxious to protect their earning capacity. Such stability in oil revenues cannot be established without the effective cooperation of major oil importers-the Asian countries, in general, India and China, in particular. Other Asian countries will also increase their economic vulnerabilities owing to cyclical disruptions in the oil demand growth. In the coming years, then, efforts should be made to further strengthen interdependence and mutually beneficial relations between India and the Gulf oil exporting nations.
Table 10. Asia-Pacific Crude Oil Imports and the Share of the Gulf
1996 1997 1998 2000 2002 2005
Crude runs 15,891 16,766 16,718 17,439 18,498 20,092
Crude direct use 487 435 423 425 413 395
Total crude demand 16,378 17,201 17,141 17,864 18,911 20,487
Asia-Pacific crude output 7,125 7,297 7,481 7,930 7,793 7,433
Own crude use 4,987 5,069 5,181 5,469 5,617 5,824
Crude imports 11,391 12,132 11,960 12,395 13,294 14,663
Within region 2,073 2,053 1,995 2,201 2,006 1,529
Africa/Americas/Europe 754 1,016 1,030 1,207 1,335 1,584
From Gulf 8,564 9,064 8,935 8,987 9,953 11,550
Gulf share 75% 75% 75% 73% 75% 79%
Source: Indian Oil and Gas Conference Papers, December 2-3, 1998, New Delhi
Conclusion
During the 1990s, energy cooperation emerged as the dominant feature of Indo-Gulf relations. This evolving energy relationship is itself part of the changing pattern of the global energy market, in which the Asia-Pacific region, in general, and India in particular, is on its way to become one of the most important customers of the oil producing countries of the Gulf. The expansion of Indo-Gulf energy ties are propelled primarily by changes in the Indian economy. India's interests in the Gulf oil resources reflect a widening gap between its oil needs and the inability of the non-Gulf states to fulfill them. India's dependence on oil still represents 39 per cent of its total primary energy requirements. There is also every likelihood that oil will be the predominant factor in its primary energy mix. India's dependence on oil from the Gulf countries has already increased and is expected to continue in that manner for at least the next decade. It is expected that Gulf oil supplies in India's imports may amount to 60 per cent by the year 2005. 36 .
Thus, Indo-Gulf energy ties should be developed properly and with due care by Indian foreign policy-makers. In recent years, Indo-Gulf energy ties have developed primarily because of India's heavy dependence on cheap Gulf oil. Moreover, most of the oil resources of Southeast Asia, Africa and North America are traditionally committed to the North. The Gulf oil resource is the ultimate source for India. Despite the best efforts to secure diverse sources of oil imports, India is likely to depend heavily upon Gulf oil, as it is doing today. During recent years, Indo-Gulf energy ties have remained confined to oil, with gas having a minor part. The economic relations between India and the Gulf countries, which developed during the oil boom period, remained limited in composition despite growing in volume. 37 The Gulf countries, in the past, had transacted more extensively with the Western market. But the decline in oil revenue from the Western market has forced the Gulf countries to diversify their economies. By building capacities to process oil to realise higher value from their oil products, they discovered that India with a market of 200-300 million customers is extremely relevant for them. It is not merely the oil consumption but the heavy demand for oil based products like petrochemicals and fertilisers that provides the basis for a more beneficial relationship between India and the Gulf countries, based on interdependence. Moreover, the mutual vulnerability and dependability between India and the Gulf has become a crucial factor in such a beneficial relationship. The Gulf oil exporters have planned to invest $6 billion to rebuild India's oil refining capacity. 38 The Kuwait Petroleum Corporation, for example, has agreed to participate in an Indian Oil Corporation (IOC) venture with a 26 per cent equity in the joint venture refinery to be set up by IOC in Daitari, Orissa. 39 Kuwait is also interested in erecting a refinery in the west coast of India in partnership with Cochin Refineries Limited. 40 However, the need of the hour is to secure the required oil from the Gulf countries at a cheap price.In this context, the oil security for India, unlike for the Western customers of the Gulf, remains an important factor to be considered very carefully.
Endnotes
Note *: Meena Singh Roy, Research Officer, IDSABack
Note 1 Some analysts now guess that the Arctic Circumpolar region may turn out to possess a concentration of gas resources but it is yet to be proved. Back
Note 2 Oil and Gas Journal, January 1995, pp.27-31. Back
Note 3 Ibid. Back
Note 4 Samir Ranjan Pradhan, The Oil Markets of India and China: Challenges and Opportunities for Oil Exporting GCC Countries, unpublished dissertation ,SI.S. JNU, NewDelhi, 1999, p.13. Back
Note 5 Hooshang Amirahmadi,Oil at the Turn of the Twenty-First Century: Interplay of Market Forces and Politics,(Abu Dhabi: ECSSR, 1996, p.9). Back
Note 6 Pacific and Asian Journal of Energy,vol.8,November 1998, p.31. Back
Note 7 Richard S. Tietelbaum, "Your Last Big Play in Oil", Fortune, 132, no.9, 1995, pp.88-104. Back
Note 8 Amirahmadi, n.5, pp.9-10. Back
Note 9 Ken Koyama, Oil Supply Security on Asian Economies" Energy in Japan, Institute of Energy Economics (IEE), No.139, December 1998, p.36. Back
Note 10 For details, see Zuhayr Mikdashi, in Studies in International Political Economy (New York: St. Martin's Press,1986), chapter-III. Back
Note 11 George Howrich and David Leo Weimer, Oil Price Shocks, Market Response and Contingency Planning (Washington D.C.: American Enterprise Institute, 1984), p.57. Also quoted in Mikdashi, n.10, Chapter III. Back
Note 12 See Sam H. Schurr, Energy Conservation and Productivity Growth, Energy Policy, (Surrey: Guildford Press, 1985), pp.126-132. Back
Note 13 Tata Energy Data and Directory,Yearbook,1998-99,p.33. Back
Note 14 Indian Petroleum and Natural Gas Statistics, 1997-98 and 1998-99, Ministry of Petroleum and natural Gas, Government of India, New Delhi, p.133. Back
Note 15 Ibid., p.79. Back
Note 16 Ibid., p.169. Back
Note 17 Ibid., p.171. Back
Note 18 International Petroleum Encyclopedia, 2000 (USA: Pennwell Corporation, Library of Congress 2000), p.286. Back
Note 19 Petroleum Intelligence Weekly, January 1999. Back
Note 20 Cyrus H. Tahmassebi,"The Changing Structure of World Oil Markets and OPEC's Financial Needs",OPEC Bulletin, March 1995,pp.7-12. Back
Note 21 Ibid. Back
Note 22 International Energy Agency(IEA),World Oil Market Report,January1999. Back
Note 23 Tahmassebi, n.20. Back
Note 24 IEA, World Oil Market Report, March 1999. Back
Note 25 Peter R. Odell,"International Market Prospects: Middle East Domination or Regionalisation?", paper presented at the conference on "Middle East Oil and Gas: Towards the Third Millennium," at Isfahan, Iran, May 8-10, 1997. Back
Note 26 Oil and Gas Journal, May 1998, pp.39-44. Back
Note 27 Hooshang Amirahmadi, "Oil at the Turn of the Twenty-First Century", The Iranian Journal Of International Affairs, Spring 1996, p.37. Back
Note 28 Pradhan, n.4, p.72. Back
Note 29 Amirahmadi,n.5,pp.30-31. Back
Note 30 Ibid. Back
Note 31 A member of the mission led by E.L.DeGoyler to the region described the oil reserves as "the greatest single prize in all history".Quoted in D. Yergin, The Prize (New York: Simon and Schuster, 1991), p.393. Back
Note 32 M.A. Adelman and M. Shahi, "Oil Developoment Operating Cost Estimates, 1955-85," Energy Economics, II, no.1, January 1989. Back
Note 33 Ken Koyama, "The Economic Crisis and Asian Oil Market", Energy in Japan, no.156, March 1999, pp.48-57. Back
Note 34 Ibid. Back
Note 35 IEA, World Oil Market Report, May1999. Back
Note 36 Tata Energy Research Institute(TERI), Newswire,May 1998,pp.8-10. Back
Note 37 Girijesh Pant, "The Changing Gulf Market and India:Trends and Prospects", in A.K.Pasha ed., Perspectives on India and Gulf States (New Delhi: Détente, 1999), pp.112-126. Back
Note 38 Ibid. Back
Note 39 Middle East Economic Digest(MEED), January 27, 1995, p.21. Back
Note 40 Ibid. Back