Life without Iranian oil

Headline : Life without Iranian oil 

Contribution of Iran in India’s Oil needs

  • India, the world’s third-biggest oil consumer and meets more than 80% of its crude oil requirements and around 40% of its natural gas needs through imports.
  • In the previous year, almost 10% of its total crude imports were from Iran.
  • In 2018-19 (first 11 months), of India’s total import of Petroleum, Oil & Lubricants, Iran accounted for 9%.
  • Iran was the fourth largest supplier of oil to India and India is the second largest oil buyer for Iran after China.
  • The below Image shows contribution of Iran in India’s oil story.

 

Background

  • The US had re-imposed sanctions on Iran in November, 2018 after pulling out of a 2015 nuclear deal between Iran and six global powers.
  • At the same time, the US had granted waivers, known as Significant Reduction Exceptions (SRE), to eight countries, namely India, China, Japan, South Korea, Taiwan, Turkey, Italy and Greece.
  • This waiver was valid for six months until 2ndMay 2019.
  • The U.S. recently announced that it will not renew this waiver from its sanctions for importing oil from Iran.
  • As soon as this decision was announced, Indian benchmark indices slid by around 1.3%, as investors concerned of rise in oil price and inflation and rushed to sell their shares.
  • The US decision came in an already unfavourable situation for India especially when-
    • The price of the Indian crude basket, which is an average of the Dubai, Oman and Brent crude benchmarks, has been rising.
    • AlsoIndia is in the middle of Lok Sabha elections.
  • To control this, the Indian government announced that it has prepared itself sufficiently to deal with the situation of restricting imports from Iran.

 

Summary of the news

  • After the US’ decision to not renew the Significant Reduction Exceptions (SRE), India and seven other countries will not be able to import cheaper Iranian oil.
  • If they still try to import Iranian oil after 1st May, they may also attract US sanctions.
  • This decision will mostly impact 5 countries among the countries that are currently enjoying waivers namely India, China, Japan, South Korea and Turkey.
  • The other three countries namelyItaly, Greece and Taiwan have already reduced their imports from Iran to zero.
  • However, in this context, India has announced that it is sufficiently prepared to deal with the situation in following ways-
    • Reducing the Iranian Oil Imports: Indian refiners have almost halved their Iranian oil purchases after the sanctions were re-imposed.
    • Adequate supply: It has put a robust plan in place for adequate supply of crude to refineries.
    • Diversification of Sources: Indian refiners are increasing their planned purchases from the Organisation of the Petroleum Exporting Countries (OPEC), Mexico, and even the US to compensate for the loss of Iranian oil.
    • Expanding Indian stakes: Indian oil companies have acquired stakes in 27 oil exporting countries, an Indian consortium acquired 10% stake in the Lower Zakhum offshore oil field in UAE and IOCL acquired 17% in Oman’s Makhaizna oilfield.

 

Challenges ahead

  • Lack of attractive offers: The substitute crude suppliers do not offer us the attractive options that Iran does like 60-day credit, and free insurance and shipping.
  • Decrease in alternate suppliers: The US has also sanctioned Venezuela, and the OPEC and allied producers including Russia have voluntarily cut output increasing the global price.
  • Rise in oil benchmark: As soon as the US announced non-renewal of waiver, the price of Brent crude rose as much as 3.3%.
  • Current account deficit: Higher crude oil prices will increase the value of imports for India, which will result in widening the trade deficit and current account deficit for India.
  • CurrencyIf the trade and current account deficits are widened, it will put pressure on the rupee.
  • Fiscal deficit: The fuel subsidy outlays could increase the burden on the exchequer leading to increase in Fiscal deficit.
  • Bilateral relationsIndia’s ties with Iran are significant and historic, and New Delhi will have to work hard to maintain some links.
  • Strait of Hormuz: After the US’ decision, Iran threatened to close the Strait of Hormuz, through which a third of the world’s seaborne oil passes every day, it could impact imports from other West Asian countries.
  • Oil Transport: As a consequence, if the seven choke points that are critical nodes of the world’s energy security grid are blocked, it could lead to hugeincreases in energy costs and world energy prices.
  • Other Threats: These seven choke points are also the most vulnerable places for importers, as they are full of threats from pirates, terrorist attacks, political unrest, war, and shipping accidents. These seven choke points are mapped below-

Section : Economics

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