Iran development a warning signal

Last week, the United States government said it would not extend its earlier exemption from sanctions to some countries importing oil from Iran. The Trump administration hopes to thus force Iran to negotiate a new deal, on the latter’s nuclear and allied activity, and alleged bad behaviour across the region. 

Last year, the US had re-imposed sanctions on Iran’s energy, ship building, shipping and banking sectors. However, waivers were granted to eight main buyers of Iranian crude — India, China, Greece, Italy, South Korea, Japan, Turkey and Taiwan. The stated aim was to give the latter time to find alternative sources and avoid a shock to global oil markets. 

Since then, Greece, Italy and Taiwan have stopped importing Iranian oil. The others expected an extension of the waivers that expire early next month. Iran was defiant and concerns emerged that it might block the flow of oil tankers through the Strait of Hormuz, a narrow waterway carrying a fifth of the world’s traded crude. The US said it would move to stop any Iranian attempt to do so. The price of oil rose immediately by almost two per cent. However, disruption worries receded, as assurances on maintaining adequate supplies came from other major oil producers — notably Saudi Arabia. 

In a press release, the Indian government says it has put in place a robust plan to ensure adequate supply of crude oil to domestic oil refineries from May onward. And, that with additional supply from other major producing countries, Indian refineries are fully prepared to meet the domestic demand for petrol, diesel and other petroleum products. 

However, the impact of disruption cannot be underestimated. India meets around a tenth of its imported oil requirement from Iran, at much better price and payment terms. Substituting these with import at higher prices from elsewhere could mean a higher current account deficit, weaker rupee, wider fiscal deficit and higher inflation rate.

India has tried to reduce dependence on oil by encouraging renewable sources of energy and production of electric cars and buses. These policies have little short-term effect on demand for oil. So, the immediate need is to step up crude oil production and boost all export. 

India’s crude oil production during March was 2.85 million tonnes (mt), around 13 per cent lower than the target and nearly 6.2 per cent less when compared with March 2018. Cumulative production in 2018-19 (the financial year ended March 31) was 34.2 mt. This was eight per cent and 4.1 per cent less than the cumulative target and production, respectively, during the corresponding period last year. India’s crude oil production has fallen continuously for the past six years. So, import dependency is now much higher.

Also, over the past five years, the annual growth of our total export in value terms has been barely around 1.15 per cent. Its share in Gross Domestic Product has gone down from 16 per cent to around 11 per cent. Demonetisation and faulty implementation of the Goods and Services Tax have hurt exporters as never before. 

Hopefully, the next government will give priority on finding ways to increase oil production and export. 
E-mail: tncrajagopalan@gmail.com




Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel