Breaking News

Crude oil on a slippery slope

By DM Deshpande

The US ended the Significant Exemption Reduction (SRE) granted to eight countries including India w.e.f. May 2. There was a small hope that the US may after all not carry out its threat. The waiver was granted to specified countries to gradually reduce imports from Iran.

According to International Energy Agency exports of oil from Iran had come down to 1.1 million barrels per day in March 2019 from the peak of 2.3 million barrels per day in June 2018.

The US sanctions will impact Iran without doubt but oil importing countries such as India will not be spared either in what can only be termed as collateral damage. The US feels that the shortfall would be made good by Saudi Arabia and UAE to the extent of 2 million barrels a day. But loss of supply from Venezuela and Libya also need to be factored in for devising an appropriate policy response from India. Political stand-off in Venezuela has resulted in one of the major oil exporters missing from the global markets.

India imported 23.5 million tons of crude oil from Iran in 2018-19 making it the third largest source of imports. India has deep rooted ties with Iran. Though India is not a super power, it is not clear whether it has decided to go with Trump to isolate Iran or left it to the new government to take a decision on the matter. Both in cases of Iran and Venezuela, the US is going ahead with it’s unilateral foreign policy measures without the sanction of the UN.

There are lots of countries which have questioned moves by the US. If India decides to continue to import oil from Iran, it may well be taking a principled stand and uphold its sovereign right to decide its own foreign policy. If there’s a price to be paid for it, it is well worth it. Instead of looking at short term gains which too seem quite uncertain it should look for long term interests and its own position in the emerging socio-political order. Even in the US, after the Trump regime comes to an end, which may be soon, there will be many who may laud the principled stand, if India takes one.

In May, India did not contract for purchase of oil from Iran. Geo-strategic plans are at play and with Trump taking a hard line, China plans to emerge as a leading country with a different narrative for developing countries. China is the largest importer of oil. There is a feeling that China may continue to import oil from Iran in a barter mode. Such an arrangement, China hopes, will keep its banking and financial institutions outside the purview of US

In the middle of all important elections in India, the full impact of the rise in oil prices has not been passed on to the consumer. But the practice of subsidizing oil has been abandoned quite some time back as a part of reforms in petroleum sector. So, the new government which will come to power by the end of this month has task cut out for itself.

Hardening oil prices is certain to widen the trade and fiscal deficit. Uncertainty will not be missed out by investors who are not in any case coming in hordes. Rupee has started declining since the beginning of this month mainly due to rising oil prices. Inflation in India is therefore on cards unless something changes radically in global geopolitical scene. Consumption of oil and petroleum products are continuously rising touching 212 billion tons in 2018-19.

With virtually no major new oil discoveries, share of net imports (after taking in to account crude that was used for exporting petroleum products) now stands at a whopping 93 per cent of the total consumption! This has remained almost static for the last four years.

So, the policy challenge is not just economic. It is complicated by issues of trade, foreign policy and aligning with partner nations in keeping with our broad principles as well as securing our economic interests. Will the new government be up to the task?


The writer is in the field of higher education- teaching, research and administration for nearly four decades. Presently he is the Vice Chancellor of ISBM University, Chattisgarh.

Check Also

Union Bank opens regional office after amalgamation

Union Bank of India opened its regional office in the state post  the amalgamation of …