An unprecedented attack using unmanned aerial vehicles or drones on Saudi Arabian petroleum giant Aramco’s oil-processing facilities, reportedly by Yemenese Houthi rebels, has shaken up the Indian and world markets. Following Aramco’s confirmation that it would shut down half its output — almost 6 million barrels a day, 5 per cent of global production — oil prices showed an intra-day increase of almost 20 per cent, the largest such spike in recent years. Effectively, all the spare processing capacity in the system has been wiped out. Much now depends on how soon Saudi Arabia can bring some of it back online, and whether tensions between Iran, which backs the Houthi rebels, and the Saudi-US alliance can be controlled. Other major oil producers may have to compensate by increasing output — the US has already announced that it will open its strategic reserve in response. In India, the rupee fell against the dollar, reflecting increased concerns about instability in the external sector and inflationary pressure, thanks to higher oil prices.
For India, there are two strategic vulnerabilities that have been exposed by this attack. The first is that India, which imports over 80 per cent of its oil, continues to be dependent on a low and stable price for its macro-economic stability. The current account deficit is currently manageable, thanks to a demand crunch domestically. But every time the price of a barrel of oil goes up by $1, India spends a little over Rs 10,500 crore more on imports. The country spent $112 billion on oil imports in 2018-19. Saudi Arabia accounts for around 10 per cent of the global supply and is the second-largest supplier of crude oil and cooking gas to India.
If enough other pressures are brought to bear on the economy at the same time, a spike in the price of oil would lead to severe instability. The government has not done enough, in spite of a long period of low oil prices since 2014, to deal with this strategic vulnerability. There is only one real solution: High and sustainable export earnings, which would provide confidence about the external account. But Indian exports have seen little growth in real terms for years and, in fact, shrank 6 per cent year-on-year in August, the last month for which the data is available. Reviving and renewing the export sector is not just imperative for growth but also for stability.
The other vulnerability exposed is of India’s own refining infrastructure. The giant private sector refineries at Jamnagar in Gujarat, for example, at least since 26/11 have been viewed as exposed to attack from across the border. In fact, the government amended the Central Industrial Security Force Act to ensure that installations even in the private sector that are considered of vital national importance are protected. The threat goes beyond refineries, of course, to other installations — such as solar parks — that may be difficult to secure from drone attacks. Sophisticated anti-missile shields may not work against drones that hug the ground and escape radar notice. These are not precisely low-tech, but are not expensive to buy or maintain. In areas further back from the national frontier, geo-fencing and drone-detection mechanisms will need to be re-examined — the civil aviation ministry released a state-of-the-art drone policy in December last year, but it should be revisited for any loopholes following this attack. Of course, regulations must also recognise that drones have many useful and productive applications, and should not stifle technological innovation or adaptation.