OIL SECTOR IN INDIA
Economics
INTRODUCTION
Petroleum, commonly known as crude oil, is a naturally occurring yellowish-black liquid found beneath the Earth’s surface in geological formations. It is refined into various fuels such as petrol, diesel, aviation turbine fuel and other petrochemical products. The oil sector is a core pillar of India’s energy security and economic growth.
India is the world’s third-largest consumer of oil. About 85 percent of crude oil and nearly 34 percent of natural gas requirements are met through imports. India’s oil demand is projected to increase from around 5 million barrels per day in 2020 to nearly 10 million barrels per day by 2030, reflecting rapid economic growth and urbanisation.
At present, around 50 percent of India’s crude oil imports are sourced from West Asian countries such as Saudi Arabia, Kuwait, Abu Dhabi, Iran and Iraq. India currently maintains around 11 days of crude oil reserve cover (about 5.33 million tonnes) and plans to increase this to nearly 24 days (around 11.83 million tonnes) under the Strategic Petroleum Reserve programme.
EXTENT OF OIL-BEARING STRATA IN INDIA
Sedimentary Basins
Sedimentary rocks cover nearly 42 percent of India’s geographical area and form the primary oil-bearing strata.
Marine Basins
Marine basins of Mesozoic and Tertiary age cover nearly 10 lakh square kilometres and hold significant hydrocarbon potential.
Continental Shelf
India’s continental shelf with probable oil-bearing formations covers about 2 lakh square kilometres.
Major Producing Regions
Mumbai High, the Khambhat Gulf and Assam are the most productive oil-producing regions in India.
SIGNIFICANCE OF THE OIL SECTOR
Economic Growth
Oil prices have a direct impact on economic growth. According to the Economic Survey 2017–18, a 10 dollar per barrel increase in crude oil prices can reduce India’s GDP growth by around 0.2 to 0.3 percent.
Foreign Exchange and Remittances
Instability in oil-producing regions affects supply lines and also impacts Indian workers abroad who contribute nearly 80 billion dollars annually as remittances.
Current Account Deficit
A 10 dollar per barrel increase in oil prices can widen India’s current account deficit by nearly 9 to 10 billion dollars.
Impact on Rupee
Higher oil import bills widen trade and current account deficits, exerting depreciation pressure on the rupee.
Inflationary Impact
Higher oil prices increase transport and production costs. A 10 dollar rise in crude prices can raise WPI inflation by around 1.7 percent.
Fiscal Impact
Fuel taxes are ad valorem in nature, so higher oil prices increase revenue for both Centre and States.
Core Industry Linkage
Oil and gas form one of the eight core industries and influence almost all sectors including transport, manufacturing and power.
Export Capability
India is self-sufficient in refining capacity and exports a significant quantity of petroleum products despite importing crude oil.
CHALLENGES IN THE OIL SECTOR
Economic Challenges
High Fiscal Burden
High fuel taxes have pushed retail fuel prices to record levels, affecting consumption and recovery.
Import Dependence
India imports nearly 84 percent of its crude oil, making it vulnerable to global supply shocks.
Price Volatility
OPEC production cuts, shale output disruptions and geopolitical tensions cause frequent oil price fluctuations.
Supply Side Issues
Reduced shale production in the US, OPEC cartelisation and disruptions due to Russia-Ukraine conflict affect supply.
Demand Side Issues
Post-COVID economic recovery and growth in transport demand have increased oil consumption.
External Vulnerability
Unpredictable decisions by oil-producing nations undermine consumption-led recovery.
Administrative Challenges
Ease of Doing Business
Private and foreign players show limited interest in exploration due to delays in project operationalisation.
Multiple Clearances
Environmental approvals, regulatory permissions and DGHC approvals delay production.
Strategic Petroleum Reserve Ambiguity
Lack of clarity regarding SPR ownership, utilisation and mobilisation processes.
Taxation Rigidity
Even when crude prices fall, higher taxes are imposed to protect government revenue.
Systemic Challenges
Low Productivity
Most oil production comes from ageing wells with declining output.
Dominance of PSUs
ONGC and Oil India dominate auctions, limiting competition.
Declining Domestic Production
Lack of new discoveries and long gestation periods reduce output.
Storage Constraints
Limited storage capacity and mismatch between imported crude quality and refinery requirements.
Political and Geopolitical Challenges
Wars and Conflicts
Conflicts like the Russia-Ukraine war disrupt supply chains and investments.
Climate Commitments
Global climate policies may turn fossil fuel reserves into stranded assets.
Instability in Producer Nations
Economic stress in oil-producing countries can trigger domestic unrest.
Dependence on Large Producers
Reduced spare capacity among large producers increases price shock risks.
GOVERNMENT INITIATIVES
Innovations
XP100 Petrol
High-octane petrol developed by Indian Oil to improve engine performance.
Winter Diesel
Special diesel for high-altitude cold regions like Ladakh.
BS-VI Fuel
Low-sulphur fuel to reduce vehicular emissions.
National Data Repository
Provides geoscientific data to attract exploration investment.
Policy Initiatives
Hydrocarbon Exploration and Licensing Policy (HELP)
Introduced a revenue-sharing model to replace cost recovery.
Open Acreage Licensing Programme
Allows companies to choose exploration blocks without waiting for bid rounds.
Single License System
Enables exploration of conventional and unconventional hydrocarbons.
FDI Policy
Allows 100 percent FDI in many segments including refineries and natural gas.
Strategic Petroleum Reserve Programme
Underground caverns at Visakhapatnam, Mangalore and Padur to handle supply disruptions.
Institutional Framework
Petroleum and Natural Gas Regulatory Board
Regulates downstream petroleum and natural gas activities.
ONGC Videsh Limited
Handles overseas oil exploration and contributes significantly to India’s oil production.
Funding Mechanism
Viability Gap Funding
Projects are awarded based on minimum funding requirement from government.
International Collaboration
Motihari-Amalekhgunj Pipeline
First cross-border petroleum pipeline between India and Nepal.
Advanced Motor Fuels Platform
International collaboration for cleaner and efficient fuels.
FUTURE PROSPECTS AND WAY FORWARD
Rationalisation of Levies
Reduce cess, royalties and profit petroleum during low oil price phases.
Public-Private Investment
Joint investments in trading, logistics and shipping.
Transparency in SPR
Clear procedures and parliamentary oversight of SPR operations.
Efficient SPR Mobilisation
Defined roles and processes during emergencies.
Diversification of SPR Holdings
Based on geography, product type and ownership.
Empowering Oil Traders
Reduce bureaucratic control to leverage global price volatility.
Energy Justice
Ensure affordable and reliable access to energy.
Transition to Greener Fuels
Ethanol blending reduces imports, pollution and supports farmers.
CONCLUSION
Energy security is vital for India’s growth aspirations. With over 80 percent import dependence, oil prices have deep macroeconomic implications. Strengthening domestic production, expanding storage capacity, ensuring policy stability and accelerating transition to cleaner fuels are essential for a resilient oil sector.
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Subject: Economics
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