The crude oil trap

End of Iran waiver means a familiar problem for India

The US has not extended the exemption from its sanctions against Iran granted to some countries, including India, that import crude oil from that country. This move, while not entirely unexpected, is nevertheless a negative shock. As much as 11 per cent of India’s crude oil imports are from Iran. It is true that India has sought to diversify from Iranian imports under US pressure. The waiver capped Indian imports from Iran at 300,000 barrels of crude oil a day. India further decreased the amount it was importing, such that in January of this year, according to published reports, there had been a 45 per cent decline in crude oil imports from Iran. 

Oil ministry officials, as well as oil-importing companies, have put on a brave face on this development, claiming that they were shifting their sourcing of crude oil to other suppliers such as Kuwait or the United Arab Emirates. However, this should be seen as what it is — bravado. It is not easy to replace the terms that Iran provided. For example, Iran would offer a longer credit period than other crude oil suppliers would — sometimes as much as 60 days, twice the regular amount of time offered by other source countries. The official pricing of Iranian crude oil was of course lower, and insurance was also cheaper if not free. Thus there will be unquestionable financial implications for the oil importers and, as a consequence, for the economy generally. A reasonable amount of Indian oil used to be imported from Iran and Venezuela; now both of these countries are no longer utilisable as sources, with obvious consequences for pricing and availability of crude oil. 

The global price of crude oil has in any case been rallying, and this will only provide a further upward impetus. It is not impossible that, in the short to medium term, the price of crude oil globally would hover between $75 and $80 a barrel. This would not be good news for the Indian macro-economy. Indian economic indicators have remained excessively dependent on the price of crude oil. While India’s current account deficit narrowed in the third quarter of the financial year 2018-19 to 2.5 per cent of gross domestic product, an increase in the oil import bill will once again send it up close to 3 per cent of gross domestic product or even beyond. The narrowing was in any case largely due to a fall in oil prices, helped along by the Iran waiver. If the global price of crude oil rises, the domestic price of fuel will also have to rise in response, with implications for consumer price inflation. The Reserve Bank of India will once again be faced with an unpleasant choice — increasing crude oil prices will exert upward pressure on inflation, while also dragging down growth. Too little has been done in the years of lower oil prices, since 2014, to reduce the Indian economy’s dependence on the price of crude oil. The best insurance would have been to, first, ensure that exports were high and could sustainably cover the oil import bill; second, to expand exploration for crude oil resources within India; and third, to increase the presence of renewable in India’s energy mix. Of these, only the third can be said to have been moved on with sufficient energy.