India accelerates alternative fuels push as oil risks rise

India is expanding its use of alternative fuels as higher oil prices and pressure on Russian crude buyers sharpen risks for the world’s third-largest crude consumer. The policy push includes a mandatory 20% ethanol blend in petrol, compressed biogas plans and a recent hydrogen-cell train test, according to government statements and analysts cited by CNBC.

The shift comes as India remains heavily exposed to global crude markets. The government has said the country imports around 88.5% of its crude requirements, leaving public finances and inflation sensitive to supply shocks and price increases.

Oil prices have risen more than 25% so far this month amid hostilities between the U.S. and Iran, CNBC reported. Energy intelligence firm Kpler has warned that prices could move above $100 a barrel if both the Red Sea and the Strait of Hormuz are closed.

India’s reliance on Russian crude adds another risk. Kpler data showed Russian oil accounted for more than 50% of India’s crude imports in June. Sumit Ritolia, lead research analyst at Kpler, told CNBC that India bought 2.6 million barrels a day of Russian oil in the first 15 days of this month, again representing more than half of its crude imports.

That exposure has drawn attention because Washington has proposed 100% tariffs on buyers of Russian oil unless peace is reached with Ukraine by September, CNBC reported. Higher oil prices have already pushed Indian consumer inflation above 4%, the highest level in 27 months, according to the report.

Ethanol leads the substitution effort

The government made a 20% ethanol blend in petrol mandatory in April, reaching the target five years ahead of schedule, CNBC reported. Ethanol, produced from feedstocks including corn and sugarcane, is mixed with petrol so that a share of each litre comes from a domestic biofuel rather than refined petroleum.

Pankaj Srivastava, senior vice president for commodity markets and oil at Rystad Energy, told CNBC that ethanol blending has become one of India’s most effective strategies for substituting crude oil. He said each increase in blending reduces gasoline imports, cuts dependence on crude and generates foreign-exchange savings while supporting agriculture and rural incomes.

Srivastava estimated that the 20% mandate could save nearly $4 billion a year through 2030, or $6.4 billion under a high-price scenario. The Indian government has said its ethanol blending programme, which began in 2014, has saved 1.97 trillion rupees, equivalent to about $20 billion, in foreign exchange and replaced 31.6 million metric tonnes of crude oil.

India has also considered other fuel changes. Local media reports cited by CNBC said the government is considering blending as much as 15% isobutanol into diesel. The government is also planning to increase production of compressed biogas, which can substitute for compressed natural gas and liquefied natural gas, while it recently tested its first hydrogen-cell-powered train.

Consumer backlash complicates the rollout

The ethanol mandate has prompted complaints from vehicle owners who say E20 fuel can damage engines and reduce mileage. The government has repeatedly denied claims of adverse impact, CNBC reported.

Diwakar Murugan, senior automotive analyst at Omdia, told CNBC that Indian automakers began producing E20-compliant vehicles after 2023. Owners of vehicles made before 2023 face higher costs, he said, while experts cited by CNBC said older vehicles not designed or calibrated for E20 may see lower fuel economy, component compatibility problems and higher maintenance needs.

Automakers have denied reports of widespread vehicle damage from ethanol-blended fuel. Reuters reported last week that a consumer court ordered Maruti Suzuki, India’s largest carmaker, to replace the car of a consumer who claimed E20-related damage.

Murugan said India’s automakers are spreading investment across compressed natural gas, hybrids, flex-fuel platforms and hydrogen for commercial vehicles as the government seeks a broader fuel base. With Russia supplying a large share of India’s crude and geopolitical pressure rising, he told CNBC that energy diversification is no longer optional.

This story draws on original reporting from CNBC.