The West Asian cauldron is cooking a bloody potion, which when served has the potential to numb the economic nerves of most nations, including India. There is heightened tension over the recent attack on two Saudi Arabian oil tankers off the coast of the United Arab Emirates (UAE) and the kingdom’s land installations by unidentified groups, leading to a sudden spike in crude oil prices of about 3 per cent.
The build-up has picked up further momentum as the United States assembled military assets in the region, aiming to cow down Iran. This has been accompanied by an end to the waiver granted to eight countries, including India and China, which allowed them to continue buying oil from Tehran. The sanctions that kick in automatically aims at drying up the flow of Iranian crude.
Supply worries are a major part of the problem. This is particularly true for India, as the Iranian crude came at a discount on price as well as lower cost of shipping, insurance and with a longer credit period. There may still be a small window available for getting crude as part of rupee trade with Iran, but there is no guarantee that such supplies could escape the prying eyes of US surveillance.
Nearly a third of all crude flow happens through Iran’s strategic Strait of Hormuz, which Tehran has been using as a bargaining point in its tiff with the US. As US President Donald Trump announced walking out of the nuclear deal with Iran unilaterally, there have been apprehensions of Tehran trying to disrupt traffic through the channel.
For the time being New Delhi has nothing much to worry about its inability to access Iranian crude as it has diversified the supply sources. India has a strategic partnership with the UAE, which supplies about 6 per cent of its crude imports.
Should things come to a crunch, Abu Dhabi has secured its oil exports by building a strategic pipeline to the northern emirate of Fujairah, opening up a new supply route to the Indian Ocean bypassing Hormuz.
However, India has a lot to worry about when it comes to the possible impact of a blockade enforced by Iran.
Dubai-based oil analysts have indicated the possibility of supply disruptions on top of an already tight crude market sending oil prices ‘violently upward’. The tight market conditions had been caused by declines in production by Iran and Venezuela, along with outages in Russia owing to the Urals contamination as well as ongoing maintenance operations in Kazakhstan and the planned maintenance in the North Sea during the summer months. Some are even predicting another oil shock.
An increase in crude prices is the last thing India would want, given that the economy is already struggling to get on an even keel in the wake of disruptions caused by demonetisation and hiccups in the implementation of Goods and Services Tax (GST). Although the government has been claiming steady progress by the economy, the numbers have hinted at serious underlying problems, which are bound to aggravate in the event of a further increase in the cost of petroleum imports.
Prime Minister Narendra Modi was lucky that since his government assumed office in May 2014, the price of the Indian basket of crude oil had crashed: from $113 per barrel to $50 by next January. The dream run went on for another year when the price further tumbled to $29. This put the Modi government in a unique situation to manage fiscal deficit and allocate resources to the new government's priority programmes.
However, halfway through his tenure oil price resumed moving in the reverse direction, as Modi’s ‘oil stars’ seemed to start looking away and prices kept rising, giving the ruling National Democratic Alliance (NDA) a serious drubbing in the December assembly elections, paving the way for Congress governments in three states.
Modi’s ‘oil luck’ seemed to shine again as he’s about to end his tenure, helping him to leave price rise caused by high oil import bill as a campaign issue of any significance.
If the May 23 results are in the BJP’s favour, Modi may not have benevolent ‘oil stars’ staring down bestowing their blessings. Instead, they will most likely be frowning. This applies to whichever party or alliance destined to take office.
K Raveendran is a senior business journalist who worked in Dubai for over two decades. Views are personal.
For more Opinion pieces, click here.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
