US sanctions on Iran: Energy import bill to hurt India as oil prices zoom

An increase in oil prices can turn out to be a blow for India as with every $1 rise increase in crude oil prices, the impact on the current account deficit is likely to be around $1 bn

The decision by the United States to pull out of the nuclear deal with Iran may have long-term impact in the context of India’s energy imports as Iran is the third largest supplier of crude oil to India, after Saudi Arabia and Iraq. Moreover, if prices touch $80 a barrel, it may turn out to be an even bigger blow for India as it will impact the current account deficit.

For every $1 rise increase in crude oil prices, the impact on current account deficit is likely to be around $1 billion. India is the second largest buyer of Iran crude after China.  In February, India had promised Iran to increase its oil imports from 205,000 barrels per day(bpd) in 2017-18 to 396,000 bpd in 2018-19, during the visit of Iranian President Hassan Rouhani’s visit to India. This commitment is likely to be hit by the US decision. 

During the financial year 2017-18, imports from Iran dropped by around 15.7 percent compared to 2016-17. The cut in imports was reportedly owing to the difference between both the countries over Farzad B hydrocarbon block and hence was likely to improve this year.   

Brent crude prices, which has the highest weightage on Indian basket, was seen at $76.9 a barrel at one point. On the other hand, West Texas Intermediate (WTI) prices were seen at $70.94 a barrel. The Indian basket crude oil was seen at $71.6 a barrel on May 8. The U.S. is now asking the buyers to cut Iran’s exports again, giving a 180 days window.

However, experts are of the opinion that this will not be having a long-term impact as the Joint Comprehensive Plan of Action (JCPOA), may not be scrapped as it still has the backing of countries like the United Kingdom, France, Russia, China, Germany and the European Union. “European countries and China are still backing the deal. Though there will be a minor increase in prices, we expect it to minimize soon as Saudi Arabia is likely to increase its production,” said Subodh Kumar Jain, director of South Asia Gas Enterprises Pvt Ltd (SAGE), that is working on a planned under-sea gas pipeline between Iran and India.

Following the increase in crude oil prices, oil marketing companies had frozen the prices of petrol and diesel since April 23. IndianOil (IOC) chairman and managing director Sanjiv Singh told the media on Tuesday that the move was to avoid panic among consumers. He added that the company has decided to temporarily moderate retail prices by not passing the required increase to consumers as the international prices are not “supported by fundamentals.”