A major recession in the United States could drag oil prices down by at least 20 per cent and strong oil demand growth in China, India and the Middle East will not be able to make up the demand shortfall, Petroleum Secretary MS Srinivasan said on Wednesday.
"If there is a serious economic recession, prices could tumble to $70," Srinivasan told Reuters in an interview.
Srinivasan, the senior-most official in India's petroleum and natural gas ministry, said expectations in some quarters that oil demand will hold up despite a US recession because of demand growth in Asia and the Middle East were far-fetched.
"A US demand recession will have a huge impact on overall crude demand. Suppose US demand falls by 10 per cent, any serious recession will impact demand by at least 10 per cent, it will be a huge impact on the overall crude surplus availability and the slack availability," he said.
Srinivasan said the United States consumed around 28 percent of all the oil produced in the world and a 10 per cent fall in demand there would equal all of India's current consumption at three per cent of global demand.
"Any marginal disruption there could upset the global oil market much more than any significant increase in our consumption. China is about 8 to 9 per cent of global demand and both (India and China) put together, we are far less than the US," he said.
Oil prices, which hovered around $87 a barrel on Wednesday after crossing $100 earlier this month, will come down by at least 20 per cent in the event of a recession and may force the Organization of the Petroleum Exporting Countries to cut back production, Srinivasan said.
"Otherwise, prices could tumble more than 20 per cent," he said.
Srinivasan said the rally in oil prices of the past few months was not caused by any supply problems and echoed OPEC's assertion that speculation by hedge funds had driven prices higher.
This is a rare view coming from an oil consumer, most of whom, notably the United States, have repeatedly pressed OPEC to raise output.
"It's not a demand-supply mismatch. Demand has not really shot up beyond control. Supply is available in adequate quantities. Other factors such as weakening of the US dollar and speculation by hedge funds is responsible for the oil price rise," he said.
"More and more money is going into speculation of energy. If speculation were to be curbed, limiting the volumes of trade to actual producers and users, prices should show a decline of $20," he added.
The official said India was looking to reduce its reliance on Middle Eastern crude in the coming years from around 60 per cent of all imports to slightly less than half over the next four years.
The country imports nearly three quarters of its crude oil requirements each year, but is a significant exporter of refined products in Asia and poised to grow bigger with a major expansion in refining capacity coming on stream.
Srinivasan said India hoped to source crude oil from as far as Latin America in two years and was awaiting additions to handling capacity at some key ports to handle very large oil tankers.
"Distance is so large (between India and Latin America) that we have to get viable volumes. Otherwise transportation costs will eat up a lot of what we will save," he said.
He forecast India's surplus refining capacity to rise to between 90-94 million tonnes per annum, or about 1.8 million barrels a day, by March 2012 from around 36 million tonnes now.
India's oil and gas demand was likely to grow by 6 per cent annually, with demand for petroleum products expected to rise 4.5 per cent a year, he said.