Markets | US-Iranian spat points to an oil slick ahead

President Donald Trump has added fuel to the smouldering US-Iran tension and, in the process, put the issue of crude oil on the boil again. He has slapped fresh sanctions on the Middle East nation following Tehran’s downing of an unmanned American drone. According to the US President, the sanctions would target Iranian Supreme Leader Ayatollah Ali Khamenei.

While Iran has dubbed the latest US sanctions as “useless”, it has warned that such unilateral action has permanently closed the path of diplomacy, triggering concern across the world about its long-term fallout.

The primary worry is about the possible impact of such tension on crude oil prices. And India, which imports more than 80 per cent of its crude oil need, obviously cannot remain oblivious to the development.

Before attempting an assessment of the impact, let us look back a little on the genesis of the US-Iran conflict. Ever since US President Donald Trump assumed office in 2016, the relations between the US and Iran have not been comfortable. Even during his presidential campaign, Trump had criticised the deal between Iran and six other nations to curb Iran's nuclear programme. Trump had called it the "worst deal ever negotiated”. In May 2018, Trump had pulled out of the agreement and the tussle between US and Iran has been on ever since.

Stepping up the ante, in April this year the US had announced that it would stop extending sanction waivers to nations importing Iranian oil— a move that had direct impact on India. Iran had hit back by signalling that it might start part of its nuclear programme, as also stating that it would close the vital Strait of Hormuz for commercial shipping purposes.

Now this is the nub of the problem. With a third of the world’s sea-borne oil passing through it every day, the Strait of Hormuz is a strategic artery linking Middle East crude producers to key markets in Asia Pacific, Europe, North America and beyond. Any conflict in the Strait of Hormuz can disrupt crude supply and throw oil prices out of gear.

India is well aware of this eventuality and, with the Indian basket of crude hovering around $70 per barrel, had stepped up diplomatic initiatives with top oil producers. Oil minister Dharmendra Pradhan had already spoken to US energy secretary Rick Perry, Russia’s deputy prime minister Yury P Trutnev, UAE minister Sultan Ahmed Al Jaber, and Saudi energy minister Khalid Al-Falih to discuss the geopolitical situation and its effect on oil prices. He sought their help to keep prices at a reasonable level.

One silver lining is that concerns over declining crude demand have so far managed to keep a lid on oil prices though some of them could be offset by risks to supply linked to new US sanctions on Iran. Opec, the oil producers’ cartel, is also gearing up to keep a leash on supply to support crude prices.

For India, which imports 84 per cent of its oil needs, any supply disruption or a price flare-up will be damaging.

According to the oil ministry's Petroleum Planning and Analysis Cell (PPAC), India's oil import dependence has risen from 82.9 per cent in 2017-18 to 83.7 per cent in 2018-19. Import dependence in 2015-16 was 80.6 per cent, which rose to 81.7 per cent in the following year, the PPAC had said.

Any spike in global crude prices will impact India’s oil import bill and trade deficit. Every dollar increase in the price of oil raises the import bill by over ₹10,000 crore on an annual basis. With overall growth remaining sluggish, a higher oil import bill and a consequent rise in the current account deficit is something the country can ill afford.

Under these circumstances, and given that crude supply from Iran has completely stopped, India needs to explore options that offer terms as attractive as those offered by Iran. India may consider stepping up oil imports from Saudi Arabia and the United Arab Emirates (UAE) at a time when the West Asian nations plan to increase their investments in India. In addition, US shale production may offer India some succour, with the world’s third largest oil importer already increasing its American supplies.

The situation is no doubt slippery. India needs to finely balance its approach towards Iran and the US, since a significant amount of Indian interests lie in both countries. With Iran, for instance, India is developing the Chabahar project, which the US had said would not be affected by its refusal to renew sanction waivers.

One thing has to be always kept in mind. Like the commodity itself, prices of crude are also highly inflammable. So New Delhi will have to be extremely careful in handling the Middle East tension.

The author is a freelance journalist. Views expressed are personal.