Oil crisis looms as West Asia simmers

Sushma Ramachandran

Senior Financial Journalist

Jagjivan Ram was considered a lucky agriculture minister. The reason was there were good monsoons and bumper harvests every time he was in that position. Luck is viewed as one of the key prerequisites for being a successful politician. Narendra Modi has been quite lucky on many counts. A critical one has been the fact that world oil prices magically fell soon after the NDA came to power in 2014. The Manmohan Singh-led UPA government had to contend with international oil prices reaching peaks of $100 per barrel during its tenure. And the then opposition party, the BJP, had not been prepared to accept the argument that economic strains could be blamed on the external global environment. It looked as if it would have to backtrack and make the very same excuse when oil prices began hardening about two years ago and the soaring oil prices of the UPA era were being replicated. But the NDA government’s luck held and prices retreated to around $60 per barrel, enabling it to keep the fiscal deficit within manageable limits.

The geopolitical situation has suddenly altered, however, with the assassination of top Iranian general Qassem Soleimani in Baghdad. This has created an extremely volatile scenario in the entire West Asian region. The repercussions are already being felt in the oil and commodity markets. Prices of the safe haven asset, gold, shot up immediately while crude oil prices surged by $3 to touch $69 per barrel. It takes no soothsayer to recognise that even if by some miracle, there are no violent repercussions, the prices of key commodities like oil will rise even further in a nervous reaction to these startling developments.

Currently, prices of the benchmark Brent crude have extended the earlier gains and are ruling at a seven-month high of $70 per barrel. US crude oil prices have also risen to about $64 per barrel. India imports a mix of crude oil from various countries which is described as its crude oil basket (COB). Till the latest events in Baghdad, the basket was priced at around $65 per barrel, which is considered manageable for this country. This has to be seen in the context of the fact that India imports most of its oil demand and the oil import bill in 2018-19 was $112 billion as against $88 billion in the previous year.

It thus has to keep a watchful eye on global oil markets. Over the past few years, there has been a tussle between West Asian oil producers, backed by Russia, and the US, which has emerged as a major oil supplier after shale oil began to be extracted in large quantities. In fact, it was the easy availability of the American shale oil that had pushed down the prices after the Modi-led government came to power in 2014. Later, the prices began to gradually firm up again as Russia reached an agreement with the oil cartel, Organisation of Petroleum Exporting Countries (OPEC), on curtailing supplies. The collaboration ensured that global oil markets once again saw prices crossing $70 per barrel in 2018.

It was during this period that India became worried over the steep rise in its oil import bill and even entered into a tie-up with China to negotiate with OPEC for better prices. The situation became more complex when the US decided to reimpose sanctions on Iran in 2018 and put pressure on India to curtail purchases from that country. This was a difficult proposition, given that a big chunk of imports have traditionally been sourced from there. It also has to be remembered that India’s economic ties with Iran have been of long standing and the current imbroglio is now going to affect other projects, like the ongoing development of the Chabahar port. As far as oil is concerned, there has already been disengagement with Iran, but other suppliers like the US have stepped in to ensure that there is no disruption in oil availability.

The fact is that in this scenario, there are few options for a country like India, given that it is heavily dependent on imported oil and high prices will skew its budget. There is little scope for manoeuvre mainly because domestic production from ageing oilfields has been declining gradually over the past few years. Domestic oil output has fallen from 37.7 million tonnes in 2010-11 to 34.2 million tonnes in 2018-19. As a result, the share of imports in total oil consumption has gone up from around 80 to 85 per cent over the same period. Efforts have been made to diversify the sources of supply and reduce dependence on the volatile West Asian region, but this area still accounts for over half of total oil imports.

The only silver lining is that foreign exchange reserves have risen to record levels right now. The latest data shows that forex reserves touched $457.46 billion at the end of calendar year 2019, an increase of 16.3 per cent or $64 billion. The rise has come on the back of strong foreign direct investment and portfolio investment flows during the year and is a much-needed cushion for the expected rise in oil import costs.

Given the huge implications for India of the unrest in West Asia owing to tensions between the US and Iran, the government needs to ensure that its oil supplies from other long-term partners are continued without any hindrance.

A massive diplomatic outreach is required while expanding imports from other areas like the US and Nigeria. Oil and gas currently account for nearly 40 per cent of this country’s energy needs. Hence, soaring global oil prices will skew plans to keep the fiscal deficit within check in the next fiscal. Luck is not enough to aid this government which will face a serious crisis unless the West Asian situation simmers down in the next few months.