India and American Shale: A win-win-win relationship

Two narratives have emerged to explain the sudden and sharp decline in global oil prices.

One school of thought believes it part of America’s strategy to punish and eventually subdue a recalcitrant Russia and President Putin.

A second band of experts believes it is Saudi Arabia and OPEC’s play to destroy the American Shale revolution.

But are these two theories mutually exclusive?  Cant a drop in oil prices kill both birds with one stone i.e. bankrupt American shale producers and subdue Russia with the same stratagem.

Regardless of the reasons or conspiracies, the sudden drop in oil prices, present India with a-once-in-a-generation opportunity to secure a solid energy future with a multitude of crucial strategic benefits.

This is how it would work.

American Shale revolution has been credited for the revival of American economy.  Along with high paying jobs that it has created, Shale oil has brought America to the brink of becoming energy independent.  If the US govt reformed its rules and regulations on energy exports, America could rival Saudi Arabia as a global oil exporter.

With several hundred thousand jobs now at stake, local and national politicians are in a fix.  Large scale bankruptcies could set back American oil revolution by several decades and allow the Saudis to perpetuate their stranglehold on global oil supply well into the 5^th decade of this century.

Given that the Saudis have played a central role in the funding and spread of militant Islam, such an eventuality cannot help India’s interests.

More importantly, demise of a large supply of oil (shale in this case) will reward OPEC with a monopolistic control over global energy supplies and with it the ability to set the price of oil.

PM Modi’s ‘Make in India’ campaign will require large and cheap supplies of energy.  Fossil fuels, despite their shortcomings continue to be central to the economic revival of Indian economy.

This is why drop in Oil prices and their accompanying threat to the American economy presents India with a god sent opportunity to achieve several strategic goals with a single move.

India should present the American administration with the following proposals:

1.       India signs long term (10 years or more) agreements with the strongest, reserve-rich Shale oil producers to supply oil to India at a price ranging from $50 to $60 per barrel (which according to most experts is the price at which producers can make a healthy profit)

a.       A recalibration should be allowed for fluctuations in exchange rate and inflation

b.      American shale companies will in effect become utilities providing oil energy to India for a duration of 10+ years

c.       India can offer to make large advance payments to these companies to help them avert bankruptcies

2.       India should also demand better provisions on the nuclear agreement so that compensation reserves can be raised from the current Rs. 500 Cr to Rs. 2000 Cr or more

a.       The US Administration should be asked to consider backing these guarantees

b.      This should eliminate a big stumbling block for American Nuclear power companies to set up shop in India adding one more energy source to an energy-starved India

3.       America should be asked to ensure that India will be exempt from any future restrictions imposed on oil exporting countries such as Iran or Russia.

America would gain immensely from such an arrangement.  But the win-win nature of this strategy is what makes it feasible

1.       By helping avert collapse of American shale industry and saving several hundred thousand American jobs, India will gain tremendous goodwill across America

2.       An arrangement of this nature will seal a longer term relationship between the two democracies and help establish a foundation which can lead to greater cooperation across other sectors

a.       For example, the heart burn caused in America due to outsourcing could be partially mitigated by India stepping in to save American jobs

3.       A steady supply of oil at under $60 per barrel will allow the Modi Administration to keep domestic inflation in check and ensure low interest rates to trigger an Indian manufacturing revolution

4.       With a large consumer (India) effectively out of the oil market (given its long term arrangements with America Shale) price of oil on the open market should not exceed the $70 - $80 range.  This in turn will restrict the ability of countries like Saudi Arabia to fund their nefarious designs beyond a geo-political line-of-sight

5.       With a large consumer locked in place at a profitable price point, American shale revolution can be extended across the globe

a.       Improving exploration and extraction technologies, could help American shale producers tap hard to reach shale reserves in China and Latin America, further depressing the price of oil

Certainly such a strategy may bring OPEC nations to gang up against India, but with America on her side India can certainly weather that storm.

I hope someone on both sides is thinking and acting on these lines.