January , 2020
US-Iran hostility: India feels heat of crude oil price hike
19:42 pm

Arun Kumar Shrivastav

The geo-political tension triggered by the killing of Iranian Islamic Revolutionary Guards Corps’ (IRGC) top military leader Qasem Soleimani and the subsequent retaliatory missile attacks on American military bases in Iraq by Iran has brought many countries including India to the edge. 

Though the armed flare-up between the two countries confirmed what the world had feared ever since US President Donald Trump walked away from the US-Iran nuclear deal in May 2018, the rising hostility has not yet affected the overall oil production or supply of crude oil, which shot up by about $10 per barrel since the US forces based in Iraq killed Soleimani in a drone attack.

The shortfall in oil supply due to tension and instability in West Asia is not a major issue for India as this can be met by enhanced supplies from other oil producing regions. What is worrying for countries like India that depend almost entirely on imports for all its oil needs is that the oil prices can go up and stay in the higher region. This can seriously impact the fiscal deficit and the consumer price index in the medium and long terms.

For India Inc., the rising oil prices will erode the margins for many oil-based sectors such as oil marketing companies and also for the paint, cement, aviation and adhesive sectors. The growing hostility is also going to hit Indian exports to Iran amid fears of payment delay issues. Indian exports to Iran in 2018-19 were at $3.5 billion while imports from Iran were at $13.52 billion. Indian exports mainly included steel, pharmaceutical products, tea, rice, and spices. Due to US sanctions against Iran, India had already cut its oil imports from Iran, which used to be about 10% of India’s total oil imports.

The good news, however, is that both the US and Iran are standing down on the latest military show-off and trying to deescalate the tension. But Trump has made it clear that his administration would impose more sanctions against Iran. And, Iran on its part has said that it would roll back its commitment from the 2015 nuclear deal with six major powers. Clearly, the two countries are not headed for a peace treaty any time soon. And until that happens, the US-Iran tension is going to continue and keep the world economy on a tenterhook.

In the aftermath of the latest round of hostility, Indian Foreign Minister S Jaishankar called up the US Secretary of State Mike Pompeo and his Iranian counterpart Javad Zarif to express his concerns about the rising levels of tension in the region. He also discussed the emerging situation with the Omani Foreign Minister Alawi and his UAE counterpart, Sheikh Abdulla bin Zayed Al Nahyan.

While India is genuinely concerned about the growing tension between the US and Iran as it has serious security implications for the entire region, it is more concerned about how this is going to impact the supply and prices of oil. It needs to keep a close watch on the developments to ensure that the tension between the two countries does not spiral out of control and engulf more of the oil producing countries. The region’s security and stability is of vital interest as that would determine the quantum of oil production and its international market prices.

Iran is the second major oil producing country after Russia which is facing sanctions from the US. This has already hit the production and supply of oil in the international market and made a few countries account for all the oil produced and made available for supply. A continuation of this scenario is not in the interest of any net oil-importing countries.

Though the US and Iran have talked about standing down and de-escalation, there is no guarantee that they will indeed follow it in letter and spirit. If the situation escalates, it has the potential to destabilise international oil production and jeopardise oil supply and energy security in many countries including India. On the other hand, a continuous and significant rise in crude oil prices can have a serious economic and fiscal fallout for countries like India.


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