Russian Oil for India and beyond..

Russian Oil Production

Russia is the world’s third largest oil producer behind the United States and Saudi Arabia. In January 2022, Russia’s total oil production was 11.3 million barrels a day (mb/d), of which 10?mb/d was crude oil and 0.96 mb/d was condensates. In December 2021, it exported 7.8 mb/d, of which crude and condensate accounted for 5 mb/d, or 64%. Condensate is an ?admixture of light liquid hydrocarbons, similar to crude oil, but very light. It is separated out of some natural gas streams at the point of field separation, when the temperature and pressure of the gas is dropped to atmospheric level.

US Oil Production

As you see from the chart above current US oil production is at the level of 12 mb/d and it was almost half at 6 mb/d in the beginning of this century. The current US production is almost at the level of US self sufficiency as it imports close to a level of 2 mb/d only , and a part of the oil in US pool is also exported. The burst of production is attributed to the policy level emphasis of putting more resources on production of oil by fracking.

Fracking is?the injection of a fluid at high pressure into an underground rock formation to open up the fissures so that trapped gas or crude oil inside flow through a pipe to a wellhead at the surface. Environmentalists are against fracking for various reasons.

When US attained self-sufficiency of oil, it was hoped that there will be no war for oil as it happened in the past. But that did not occur, because then other goals emerged. Goals like maintaining US dollar as a preferred currency of the world, preventing rise of China as an economic power superseding USA, suppressing Russia's military and economic power etc.

Cost of oil derived from fracking is much higher than ?cost of producing oil from traditional oil wells at Saudi Arabia or Russia. It is estimated that at a price below 65 USD to a barrel most of the small oil fracking companies will be unviable. It has happened twice in the past and that has created negative investors sentiment. So even at a price of 100 USD a barrel, there is not much enthusiasm to open new fracking wells. The view is by the time effective production commences in 6 months, in a new fracked well, the price may come down below 65 USD, making the investment unviable.

Therefore, if the global oil price goes down, some fracking activity will stop at USA, because production will become uneconomic. At that stage USA can continue to produce high cost oil only if it can force the US industry and US customers to buy oil at a rate much higher than the world bench marks. This is not possible in a free economy like USA, where everything is tied to profit.

US sanction on Import of Russian Oil

Since it is self-sufficient on oil it is very easy for USA to impose sanction on Russian oil. But as EU is not so fortunate, they cannot sanction Russian oil like USA. EU has continued to buy Russian oil, even during the Ukraine war and even in the month of March, 2022. In an interview, Indian Foreign Minister has said that as per his information in the month of War (i.e. March 2022), EU have bought 15% more oil from Russia, than the previous month, when the war was absent. There is no report for reduction in Russia’s oil production in March 2022, though IEA of USA is projecting a reduction of 30% in Russia’s oil production over the year 2022, because of so called "hesitance" of European customers to buy Russian oil in protest of Russian action on Ukraine and also because of various banking and insurance sanctions imposed on Russia. The fracking oil industry of USA is taking IEA's statement with a pinch of salt.

Russia switches over to delivered price and discount

To address the issues, Russia has taken two steps. Where insurance is declined by western insurance companies, Russia has switched the prices to delivered basis (i.e. CIF price), which means insurance and freight is Russia’s headache. It can choose to send the oil uninsured or Russian insurance companies can provide the insurance to Russian oil companies, without any back to back re-insurance from western insurance companies. Since Russia has a huge fleet of oil tankers, freight is not a big botheration. In the worst case, Russia can store the oil in floating tankers without selling them, as Iran had done in the past and has been still doing, or push the oil to its emergency reserves. This could also be the reason why Russian oil production is not showing any significant reduction right now.

OPEC + decision

OPEC + is a group of 23 nations led by Saudi Arabia and includes Russia. On March 31, 2022, they decided that the oil market is “well balanced” despite the Ukraine war and sanctions against Russia. So they increased production only by 0.4 mb/d. They indirectly sent a message to the world either you buy Russian oil or get lost. They also recognized that the sanction of USA on Russian oil has no effect, as the rest of the world has not sanctioned and probably cannot afford to sanction Russian oil. USA used to buy about 0.2 mb/d of oil from Russia, that being out of market because of US sanctions on Russia, they have increased the production only by 0.4 mb/d, which is really reasonable. With the capacity of fracking oil of USA still expandable, no glut in supply is supposed to occur. So they are quite right in their place.

Iran oil sanctions

Iran oil sanctions are still in place. The situation is complicated by Iran’s support to the Houthi rebels who have made recent attacks on Saudi oil assets and Iran’s own attack on US Consulate area in northern Iraq, which it said is in response to Israel’s attack on the national guards of Iran, stationed in Syria. So removal of sanctions on Iran’s oil is further delayed and in fact USA has imposed a few more new sanctions on Iran. And even if the sanctions are lifted, it will take a few more months for new oil to flow in from Iran. In the meantime, however, Iran has huge quantity of oil stored in floating tankers and is waiting for the price to strengthen further, when countries will be overlooking or allowed to overlook sanctions to buy whatever oil is available for their energy security.

India’s situation.

India is a highly import dependent country (83%) so far as oil is concerned. India's also has 43% import dependency on Natural Gas. Oil and gold are the two most significant items in India’s import basket. India’s daily requirement of oil is around 5 mb/d. So India’s energy security cannot be taken lightly and both at the policy level and at the entity level India is highly proactive to market conditions, considering both price and delivery.

Advantages of the Russian Proposal

There are two advantages of the Russian proposal: (a) the prices are on delivered basis and (b) the prices are heavily discounted from the pre-war prices.

With OPEC+ keeping a tight leash on supply, oil price cannot be reduced by release of only some quantity of oil from the US emergency reserves, which in any case will be mostly used up in USA itself. The West Asian countries, from which bulk of the Indian oil supplies come, are in no mood to reduce the price, by increasing supply. On the other hand for post covid growth of the economy, India’s oil need can increase to 5.15 mb/d during the current years.

As opposed to the market price of 100 dollars or so, India is being offered a delivered price of 65 dollars ( 62 + 3 for shipping ) or so for Ural oil. ?It is a mix of heavy sour oil of?Urals and the Volga Region?with light oil of Western Siberia. Many Indian refineries have capacity to process this oil with a little higher processing cost.

India could be buying some quantity through Swiss Oil intermediary Vitol, just to prove that there is no sanction on Russian oil and can also directly from Russia through bi-lateral trade.

If India can manage to get to 1 mb/d from Russia @ 65 US dollar equivalent and rest 4 md/d at 100 US dollar equivalent then also the weighted average cost will be 93 US dollars per barrel which is significantly higher from 2020 and 2021 price. Of course because of some medium term fixed price contracts, this average may not come into play in 1or 2 months.

Impact on India

Compare this with the prices of earlier years. The average price of Indian basket crude oil was estimated to reach 39.32 U.S. dollars per barrel in the financial year 2021 and this significantly decreased from the previous year’s average of 60.47 U.S. dollars.

It would be very good if India can procure its entire requirement of crude oil from Russia at a price of 65 dollar, but that is not possible for technical reasons and also because Russia has to cater to its other markets. (On a conservative basis that will include China and some CIS and CEE countries, and Chinese demand for Russian Oil is increasing too.)

So if the war and war related tensions continue for next 4 months, beyond the month of April, 2022, India’s oil import will be at 93 dollars a barrel compared to 60.47 dollars a barrel in 2020 and the additional burden on India compared to 2020 cost will be (93-60.47) x 5 mb/d x 120 days = 19.5 billion dollars. The burden, when compared to 2021 costs, will be (93-39.32) x 5 x 120 days = 32.2 billion dollars.

US is not satisfied that geo-political events are pushing India to bear the cost of war of 20 to 32 billion dollars because of its war games, its NATO postures and its constant encouragement to push Ukraine to challenge Russia and redeem the lost territories of Crimea (which originally belonged to Russia and was a gift to Ukraine). It also constantly encouraged Ukraine not to comply with the Minsk agreements. NATO has not taken Ukraine in its fold, but has kept the possibility dangling, to create a permanent tension.

US also wants India not to buy Russia oil and thus incurring further loss of (100-39.32 ) x 1 x 120 = 7.28 billion dollars. And that is why they have sent a person of Indian race (Dalip Singh ) to India to convince India to self-inflict some more damage.

Dalip Singh must be told that the sanction tools designed by him has not worked at all. Strengthening of Ruble to pre-war level is a proof of that. And the Polish PM in his address as recent as April 2, 2022 has admitted that in so many words.

Impact on Indian Budget

When Oil price fell sharply, the Indian government did not pass on the benefits to the masses. The central government mopped up the surplus by way of additional Excise Duty and the provincial governments mopped up the surplus by way of additional VAT / Sales Tax. This came handy in bridging the budget as well as meeting extraordinary covid related expenditure.

Now India has to roll back these extra Excise Duties and VAT / Sales tax so that the pressure on the masses is not that much. And gradually the inevitable will occur. They have to increase the prices of petrol and diesel substantially. This may create political unrest, some symptoms of which are already emerging.

The price of energy has a multiplier effect. And as a result, for the first time in many years India will be perhaps having a double-digit inflation as costs of all goods and services will increase.

And the US inflation is also projected to be in double digits having ripple effect in the rest of the world.

How can Russia give such huge discounts to friendly countries?

The answer lies in its Fiscal Breakeven of oil price which is seen in the chart below. The bars are the historical oil prices realized by Russia and the dashed line is the fiscal break-even. Because of the war situation the fiscal breakeven can move up to 50 US dollar, as some consumption will come down. On the other hand in the gas front Russia is making a big profit currently, which will have a positive effect on fiscal breakeven.

If Russia sells oil at a price of 65 USD ?even including freight, it is making a profit of USD 15 from an assumed fiscal breakeven of 50 USD on a very adverse basis.

?The political aspect

India like most of the non-aligned countries of Asia and Africa are not interested in a unipolar world. This is not in India’s interest to achieve a super power status. This is also not in India’s interest to exploit the potential of human capital of India, because in a unipolar world there could be much more restrictions on India. On top of that is the fact Russia has been a friend of India for last seven decades. Much of India’s development in the field of atomic power is courtesy Russia, and a significant part of the defense assets of India are supplied by Russia at a much cheaper price than the west and most of the time with technology transfer. The Brahmos hypersonic missile is a game changer in Indian arsenal courtesy Russia. Even India’s PSLVs have some elements of Russian contribution. There is another reason here, which is convincing the Indian public that Indian government is doing as much as possible, to safeguard the oil price and its impact on Indian population. Indian defense establishment, as well as Indian people are generally supporters of India. Any expert from India's defense establishment, called by Indian media is talking in support of Russian approach, considering most of them are aware of the position of UK and USA in Bangladesh war when India was burdened with 10 million or more of Bangladesh refugees, because of the oppression conducted by Pakistan in the then East Pakistan. UK and USA had sent their Aircraft Carriers to Bay of Bengal and Indian ocean in support of Pakistan, but Russia with its submarines stood strong in support of India. Russia even dissuaded China from opening a second from in northern India, at the advice of USA. These are well documented historical truths. Also being a colony of UK for 190 years, anti-UK and anti-USA sentiments are carried by India over generations.

Weakness of Dollar

USA is a highly indebted country. Current highlights are as follows :

The debt to GDP ratio is 136%.

The actual federal budget deficit is dollar 3.95 trillion.

The net annual interest on debt is dollar 337 billion.

(i.e. the annual interest payment alone of the US debts is more than the 300 billion dollars of foreign assets of Russia which have been frozen/misappropriated by the West )

The gold backing of USD was removed about 50 years ago. On August 15, 1971, when President Richard Nixon announced that the United States would no longer convert dollars to gold at a fixed value, thus completely abandoning the gold standard. )

US Dollar is completely a fiat Currency. USA holds the currency as world currency by influence, manipulation, war gaming, economic and defense unions etc. all in the name of freedom and liberty.

If you see from the fundamentals US trade deficit is at an alarming level and is ever increasing. It was about 859 billion dollars in 2021. Sustaining such high level of trade deficiency would not have been possible, if US dollar was not one of the world's reserve currencies.

Russia has learnt a lesson by keeping a substantial part of its reserves in US dollars by way of seizure of the same, and other countries will also learn such lessons, when US feels threatened. US had to leave Afghanistan being defeated in the war, but USA was not releasing 9 billion dollars worth of Afgan Assets held by it. Subsequently the government agreed to release it partly in the form of humanitarian aids (which will be costly US goods) and partly to be adjusted towards compensation payable to 9/11 victims in USA.

I am sure, after the Ukraine war is over, some case on compensation will move to US courts and USA will try to withhold a part of the frozen assets of Russia in the name of compensation to the victims. Of course, Russia has also put an embargo on sale of foreign assets by unfriendly countries to square off its foreign assets illegally held.

Threatening posture of USA

Any attempt to by-pass USD is looked down upon heavily by USA. The exceptions are its fork currencies like Euro, British Pound and Japanese Yen.

The visit of US representative Daleep Singh to India was to convey this threatening posture in support of US Dollar.

India and Russia are the 3rd and 6th largest economy in terms of purchasing power parity, with stable economies. If they want they can convert their entire foreign trade into Ruble-Rupee channel, which will remove lot of support to the dollar. ?But they do not trade that much.

As per Russian figures, bilateral trade amounted to USD 9.31 billion in 2020-21, with Indian exports amounting to USD 3.48 billion and imports amounting to USD 5.83 billion. By identifying complimentary needs they can easily take the trade to above 10 billion dollars. Even that will be a small sea in the ocean of hegemony of US dollars.

Why is US worried ?

Then why this worry of USA ? The worry is if all nations try to do bilateral trades and bypass SWIFT then what will happen to US surveillance through SWIFT? They will trade in nuclear materials, defense electronics, heavy water, nano-technology, prohibited chemicals, arms and aminations, software etc. without even USA and the western countries knowing the same. This may even affect their earning from intellectual property transfers.

Make no mistake, SWIFT is not only a messaging system, it is a surveillance tool also.

And the next worry is will this encourage Chinese yuan to take its rightful place in the world trade as a substitute and parallel currency for US Dollar? Chinese currency is already a part of SDR of IMF with a very high weightage.

To do that China will have to make yuan a fully convertible currency. And secondly China needs one or two ?big supports for doing bulk transactions transactions in yuan. Russia is already there. Saudi Arabia could be one, because it is also concerned of its US dollar reserves. Brazil could be one. India could be another. (but India is not going to support in the current environment of border skirmishes between China and India. )

USA is looking at this possibility with lot of disdain. Meantime USA will go on threatening countries to trade in US dollar and its fork currencies, as per their wish and at their price.

?Is Russian Gold Standard in the offing?

Russia has favorable trade surplus year after year. And now Russia’s central bank has started purchasing gold at a price of 5000 roubles per 1 gram of gold. Since gold has a price in US dollar also this fixes price of US dollar in terms of Gold and that works out to around 81 ruble per US dollar. If the EU countries do not accept gas for ruble scheme, Russia can stop supply of gas altogether to the unfriendly countries and follow gold for ruble scheme. Since Russia produces about 22 billion dollars worth of gold every year (the export of which is almost stopped because of sanctions) that gold production can also be transferred to Russian central bank. Even if the EU countries pay in Euro, Russian banks will now never keep those Euros in the branches of Gasprom Bank at Europe, rather than they will buy gold with those Euros and shift it to their home branches, from whom Russian central bank will buy those golds. Ultimately the west will try to see that Russia cannot buy gold by either freezing additional Euros at Gazprom Bank or sanctioning gold by Russia itself. West can do that only when they are prepared to import zero gas from Russia, because that will mean buying gas for free. Actually before the Ukraine war Russian ?banks should have converted most of its Euro and Dollar balances into gold and sold it to the Central Bank of the Country. I think it was a misjudgment on the part of Central Bank of Russia to keep so much foreign assets in the form of Dollar or Euro in European and American banks. Also the political leadership must not have consulted the Central Bank of Russia, before going for a full scale war. They have missed a golden opportunity. Be that what it may Russia has still chance to build a gold standard around ruble in course of a few years, with proper planning. Confiscation of Russian foreign assets by the western countries does not augur well for any country including India who have kept their gold with London or IBS. China, Saudi Arabia, UAE, Qatar, Brazin and many other Eurasian countries are also following all of this development very closely and strategize, how to use their gold assets.