Narendra Modi’s role in Crude Oil Crash

It is interesting to note that India’s most loved Prime Minister Mr.Narendra Modi would have actually been responsible for the crash in Crude Oil prices. If you could extrapolate the situation which is responsible for the crash in crude oil prices, it kinda reveals that it is Mr. Narendra Modi – whose initiative has led to the crash in crude oil prices across the globe.

While it would be an exaggeration to put all the “blame” on Modi, it could be true that he had a fair role in the crash of oil. By implementing his “Look East” policy, Modi is making India consolidate its presence in South East Asia. Russia has always been a trusted partner of India and Modi is balancing his relationship well with the United States too.

Ever since he was elected the Prime Minister with a thumping Majority, he proclaimed that he would work closely with Russia. He started taking baby steps towards sourcing oil from Russia instead of relying solely on Iran and Arabia who were routinely over-charging Indians on Oil. Modi Negotiated with Russians and I believe the Russians even agreed to accept Indian Rupee for transactions. So on December 11, 2014 when Modi had invited Vladmir Putin to India, he struck a deal with Russia to import oil from them to the tune of US$ 40 Billion (USD 10+ Billion each year, about 61000 crores annually at present exchange rates) in the forthcoming years (http://in.reuters.com/article/2014/12/09/india-russia-energy-idINKBN0JN15X20141209). Everyone agrees that oil prices reduced due to a wide gap in supply and demand. And everyone agrees that together India and China are the largest consumers of Oil. Until now, Arabia was almost the sole supplier for these two hugely populous nations. (Only recently Modi government had planned to diversify oil imports – http://www.livemint.com/Politics/dtqX201kKrlYSwlaNuuH5N/India-plans-to-diversify-oil-imports.html).

Prime Minister Narendra Modi has assured Vladmir Putin, who is on a visit to Delhi, that India opposes any form of sanctions against Russia. The prime minister has pitched for more cooperation and bilateral trade ties with Russia. Narendra Modi and Putin have agreed to increase the oil imports from Russia by 40 times the present levels, starting early 2015. This would significantly reduce India’s reliance on Arabian peninsula for oil. Arabia will not longer be a dictator as far as pricing oil is concerned. The reduction in pricing by Arabs is to ensure that they do not loose big markets to Russia which is aggressively pursuing new markets for selling its Oil and Nuclear Technology at a fair price.

During the BRICS summit, It was Narendra Modi who proposed the idea of creating a BRICS focused development bank (http://www.telegraphindia.com/1141116/jsp/business/story_19047093.jsp#.VMPqV_mUfF8). This initiative – in the long run – may strengthen local currencies – which in turn could affect the position of US Dollar as a fiat currency. The initiative on BRICS Development Bank is significant because these countries are major investors of US Dollars in oil trade. With payments in local currencies, the fluctuations in Dollar would not affect the pricing of the Oil and it gives more bargaining power for the concerned nation which consumes Oil.

Even before BRICS summit, Modi highlighted the importance of sourcing oil from Russia while talking about building closer ties with Russia – which is also a BRICS member. (http://articles.economictimes.indiatimes.com/2014-07-17/news/51656791_1_prime-minister-narendra-modi-indian-pm-president-putin). This was one of the important issue discussed during the summit and Narendra Modi promised closer ties with Russia – which was reciprocated by his Chinese counterpart. Being a BRICS nation, China followed Narendra Modi’s initiative and increased its quantum of oil imports from Russia (deal signed on December 22, 2014 – following Narendra Modi’s initiative). Obviously China has much greater demand and it was nine times greater than what Indian government planned to buy from Russia (about $360 billion to $400 billion). The huge demand for oil from India and China were a considerable factor in pricing the oil globally. Arabian countries almost had the monopoly in pricing it.

Coincidentally USA devised a way for extracting Shale Oil reserves and the need to import from Arabian countries reduced further. The demand fell all of a sudden while the supply remained the way it was. This is also one of the important reason as to why Crude Oil has crashed to this level. But only two states in USA are presently extracting oil this way and reduction in prices is not just because of discovery of Shale Oil alone. India and China had been voracious consumers of Oil and both the countries can jointly cause huge impact. The decision by both these countries to source oil from Russia is a tremendous blow to Arab monopoly on oil – thanks to the initiative by Narendra Modi. The reduced demand from India and China along with the discovery of Shale Oil reserves in USA led Arabian union to reduce oil prices drastically – that is exactly what we are witnessing now.

Consistent with his style of functioning and his corporate vision, Narendra Modi announced that Government will only focus on governance and oil companies would source oil from Russia. Subsequently, Essar signed a multi-billion dollar oil deal with Russia’s Rosneft spread over 10 years.[http://www.livemint.com/Politics/xNZ9QGY2v4hE0OGpZp4UuN/Essar-Oil-signs-10year-crude-import-deal-with-Russias-Rosn.html]. This in turn would create ample job opportunities for youth of India.

Narendra Modi and his Chinese counterpart have categorically stated that they would not be paying for Russian oil in US dollars. This is a landmark decision which is sure to cause an impact across the globe. This may further accelerate the decline on the value of dollar and would help in strengthening Indian Rupee and Chinese Yuan. Narendra Modi has asked the Oil Ministry to investigate and discover new Oil fields in India for auction (http://articles.economictimes.indiatimes.com/2015-01-16/news/58149501_1_marginal-fields-oil-india-ltd-oil-minister-dharmendra-pradhan). India at this point, is not self-sufficient as far as Oil is concerned. If the discovery of new oil fields in India are significant, it would slowly make India self-sufficient in Oil thereby reducing the need to depend on Russia. If this happens, Indian economy would grow at a highly accelerated pace. Additionally government is not going to control the oil fields, but would auction it to Companies willing to extract them. It means there would be healthy competition between Indian Companies and there would be plenty of job creation too.

Given all these, you can expect oil to reduce further down – to about $30 – $35 levels. It would stay that way for a good period of time until some other developments drive it north. The big question is does Modi realize that he had initiated the process that caused this downward trend of oil ? And how long oil would remain this way? Is it good for the Indian Economy as a whole ? Hope Budget 2015 puts Indian economy on a fast track as far as growth is concerned. But until then, lets give Narendra Modi the credit where it is due!