Print Friendly, PDF & Email

Insights into Editorial: Uncertain times: On India’s oil imports

Are you Ready for Insta 75 Days Revision Plan (UPSC Prelims - 2020)?


Insights into Editorial: Uncertain times: On India’s oil imports


                                     

Context:

United States announced that it would not extend beyond May 1 the 180-day waiver it had granted to eight countries, including India, to purchase oil from Iran.

India will stop importing crude oil from Iran following the US move to end sanction waivers, and will use alternate supply sources such as Saudi Arabia to make up for the lost volumes.

The Trump administration decided not to renew waiver that let countries like India buy Iranian oil without facing US sanctions.

 

Iran and India’s oil basket:

India, the world’s third-biggest oil consumer, meets more than 80% of its crude oil requirements and around 40% of its natural gas needs through imports.

Domestic oil and natural gas production have been declining for the last few years, even as the energy needs of the economy have grown.

India is Iran’s top oil buyer after China. In 2018-19, it imported 23.5 million tonnes from Iran; in the previous year, almost 10% of its total 220.4 million tonnes of crude imports was from Iran.

Iran was the fourth largest supplier of oil to India in 2018-19, and other suppliers may not provide the same benefits in the form of price and credit facilities.

 

India acceding to the US sanctions on Iran:

India has said the country is “sufficiently prepared” to deal with the impact of the US decision to curtail the temporary exemption from sanctions on the purchase of Iranian oil.

Government mentioned that “a robust plan” has been put in place for adequate supply of crude to refineries.

Petroleum Minister said the country plans to increase imports from major oil producing nations other than Iran, indicating that it will be acceding to the U.S. plan to reduce Iran’s oil exports to zero.

However, Ratings agency ICRA has estimated that stopping oil imports from Iran could cost Indian refineries as much as ₹2,500 crore.

 

Potential impact on India:

Analysts point to key metrics that could be impacted by the current situation:

Current account deficit:

  • Higher crude oil prices will widen the trade deficit and current account deficit, given that the value of imports goes up with crude oil, and that the quantity imported tends to be sticky in general.

 

  • According to CARE, a permanent increase in crude oil prices by 10% under ceteris paribus conditions could translate into the current account deficit increasing by 0.4-0.5% of GDP.

 

Rupee:

The currency could be impacted if the trade and current account deficits were to widen. An increase in the import bill will tend to put pressure on the rupee.

 

Inflation: There could be significant impact on inflation, given how crude oil prices move and the extent to which the government allows the pass-through to the consumer.

The crude oil price could be an important consideration when the Monetary Policy Committee meets for its bi-monthly meeting in June.

 

Fiscal impact: There could be a two pronged impact on government finances both on the revenue side and on the expenditure side.

On the revenue side, higher oil prices mean more revenue for the states as tax is ad valorem; for the Centre, though, it may not materially impact the fiscal math as the duty rates are fixed.

 

US wants to Isolate Iran by imposing Sanctions:

US secretary of state Mike Pompeo said that the latest decision “intended to bring Iran’s oil exports to zero.”

Oil is the lifeline of the nation, which continues to export one million barrels per day (bpd). It exported 2.7 million bpd before the sanctions kicked in last year.

US said so far, the sanctions had deprived the regime of more than $10 billion in oil sales.

 

Iran responded: Strait of Hormuz: world’s most critical oil choke point:

Iran threatened to close the Strait of Hormuz, a neck of water between its southern coast and the northern tip of the sultanate of Oman.

Strait of Hormuz lane through which a third of the world’s seaborne oil passes every day.

It is a threat that Iran has made earlier, too and this strategic area has seen several flashpoints erupt in Tehran’s fraught relationship with the West over the years.

Iranian exports will not actually reach zero. “China will continue buying Iranian crude, perhaps as high as several hundred thousand bpd, to save face.

China may barter for the oil or wall off banks to handle transactions in renminbi. India will likely take a similar position.”

Iran has repeatedly threatened to disrupt the flow of oil through the Strait of Hormuz if it’s prevented from using the Persian Gulf through which about a third of all oil traded at sea passes.

Such a move could threaten Saudi exports as the route is used for most oil shipments from the kingdom.

US statement says that if Chinese imports from Iran do not drop quickly, the US sanctions could be applied to Beijing’s central bank, the People’s Bank of China.

 

Conclusion:

International energy markets are critically dependent on reliable transport.

Over 60% of the world’s petroleum and other liquids production moves on maritime routes.

Blocking the maritime choke points can lead to huge increases in energy costs and world energy prices.

Choke points are also the places where tankers are most vulnerable to pirates, terrorist attacks, political unrest, war, and shipping accidents.

For India, If India is to protect its interests in the ever-volatile global oil market, the government will need to take steps to diversify its supplier base and also work towards increasing domestic sources of energy supplies.

Opening up the renewable energy sector for more investments will also help avoid over-dependence on oil from the global market to meet the country’s ever-increasing energy needs.