India Explores Alternative Fuels Amid Rising Oil Prices and Russian Supply Concerns

The world's third-largest crude consumer, India, is testing alternative fuels such as ethanol from corn and biogas from animal waste, as rising global oil prices and potential curbs on Russian supplies threaten the country's energy security.

The South Asian country has made it mandatory to blend 20% ethanol into petrol, five years ahead of schedule, and is planning to scale up production of compressed biogas — a substitute for compressed natural gas and liquefied natural gas.

According to local media reports, the government is considering mixing 15% isobutanol in diesel, while last week it also successfully tested its first hydrogen cell-powered train.

Alternative fuels are becoming an increasingly important pillar of India's energy security strategy, especially as the country faces rising global energy prices and supply constraints, experts said.

With Russia supplying a substantial portion of India's oil and geopolitical pressures mounting, "diversification [of energy] isn't optional anymore," Diwakar Murugan, senior automotive analyst at Omdia, told CNBC.

Given the government's push towards energy diversification, automakers in India "are hedging their bets" across compressed natural gas, hybrids, flex-fuel platforms, and hydrogen for commercial vehicles, he added.

As hostilities between the U.S. and Iran have flared up, oil has climbed over 25% this month so far, and energy intelligence firm Kpler has warned that prices could climb above $100 a barrel if both the Red Sea and the Strait of Hormuz are closed.

According to data from Kpler, Russian oil accounted for more than 50% of India's crude imports in June, replacing the supplies from the Middle East to the South Asian country.

In the first 15 days of this month, India purchased 2.6 million barrels of Russian oil every day, representing over 50% of its crude imports, Sumit Ritolia, lead research analyst at Kpler, told CNBC. But this reliance on Moscow makes India a target for Washington's fresh sanctions that propose 100% tariffs on buyers of Russian oil unless peace is made with Ukraine by September.

High oil prices have already weakened India's public finances, pushing consumer inflation to over 4%, the highest in 27 months. India meets around 88.5% of its crude needs via imports, so any alternative fuel that can even partially substitute this demand will provide relief to the economy.

"Ethanol blending has emerged as one of India's most effective crude oil substitution strategies," Pankaj Srivastava, senior vice president, commodity markets-oil, at Rystad Energy, told CNBC.

"Every incremental increase in blending" reduces gasoline imports, lowers crude oil dependency, and generates "substantial foreign exchange savings" while supporting domestic agriculture and rural incomes, he said.

The mandate to blend 20% ethanol in petrol is estimated to save close to $4 billion annually till 2030, and $6.4 billion under a high price scenario, Srivastava said.

As per the government, the ethanol blending scheme, which started in 2014, has resulted in foreign exchange savings of 1.97 trillion rupees ($20 billion) and substituted 31.6 million metric tonne of crude oil.

While India has additional ethanol capacity to raise the blending percentage even higher, up to 25%, the government has put the plans on hold as the earlier mandate is facing public backlash. Car owners have raised concerns about blended fuel damaging their vehicles and lowering mileage.

Several legislators raised the issue of the impact of ethanol blending on vehicles on Monday, while the government has repeatedly denied claims of any adverse impact.

Auto companies in India started making vehicles compliant with E20 — 20% ethanol blended petrol — after 2023, said Murugan of Omdia, but owners of cars made before 2023 "face double the cost."

Older vehicles not designed or calibrated for E20 fuel may experience reduced fuel economy, compatibility issues with certain components, and higher maintenance requirements, experts said.

Auto companies have denied reports of widespread damage to vehicles due to ethanol. However, last week a consumer court ordered Maruti Suzuki, the country's largest car maker, to replace the car of a consumer who claimed damage due to E20 fuel, as per a Reuters report.