Bracing against Brent

It is time for India to be imaginative about its energy strategy

India’s crude import bill in FY-2018-19, when the country had imported 84 per cent of its crude oil requirement, was the highest in the past five years. India spent $111.9 billion on oil imports in 2018-19 compared to $87.8 billion in FY 2017-18. Moreover, two-thirds of the imports were sourced from conflict-prone regions of the world. The increasing hostility between the US and Iran might thus have an adverse impact on India’s domestic supply and import bill.
 
Iran is the second largest country in the Middle East and has the World’s third largest oil reserves. It used to be the biggest supplier of crude oil to India after Iraq and Saudi Arabia in 2018. Iraq supplied 46.61 million tonne of the total 207.3 million tonne of crude import by India in 2018-19, followed by 40.33 million tonne from Saudi Arabia and 29.9 million tonne from Iran, as per the data released by the Directorate General of Commercial Intelligence and Statistics. The UAE, Venezuela, Nigeria and the US made up for rest of the imports. Indian oil refiners preferred West Asia crude as it was more cost effective; however, India stopped import of crude oil from Iran in May 2019 after the expiry of the waiver granted by the US.
 
The US started supplying crude oil to India in 2017, and has become a major source since then. In FY 2018-19, import from the US increased more than four-fold to 6.4 million tonne. There was a further increase of more than 72 per cent from April to August 2019 as the US supplied 4.5 million tonne compared to the 2.6 million tonne in the same period in the preceding year.
 
Recent US sanctions have cut off Iran from the international financial system and devalued its currency, decreased the Iranian oil exports to almost nil, scared off international banks and suppliers even in sectors like food and medicine and caused a decrease in foreign investment in energy, financial and shipping sectors.

If the Brent crude prices shoot up again, there will be a huge impact on India’s economy and energy security

Contrary to expectations, India remained largely unaffected by the cancellation of the exemption granted by the US to its sanctions. To meet its oil requirements, India increased imports from Saudi Arabia, Iraq, Venezuela and US.
 
Once the US imposed sanctions on Venezuela’s production and the sale of crude oil, India had to stop oil imports from that country. According to the Ministry of Petroleum and Natural Gas, crude imports from the Organisation of Petroleum Exporting Countries (Opec) decreased to 78 per cent of the total imports during the first four months of FY2019 compared to 83.2 per cent during the corresponding period a year ago. On the other hand, India has increased its oil import from the US.
 
It is interesting that the theatre of the current West Asia crisis is Iraq which is another major supplier to India. The US sanctions and air strikes are being seen in some quarters as a strategic manoeuvre by the country to establish itself as global supplier of crude oil and natural gas. With Iran already closeted, there would be an increase in the demand of oil which would lead to an increase in prices.
 
While Brent crude prices shot up to around $70 a barrel due to the prevailing hostilities, since the beginning of January, it has come down somewhat. But if the prices shoot up again, there is likely to be a heavy impact on India’s economy and energy security. A spike in prices may also require a reconsideration of oil supply agreements.
 
Any increase in the price of crude oil has a significant impact on inflation as it drives monetary policy decisions. Retail inflation rose to an over three-year-high of 5.5 per cent in November 2019, triggered by a rise in prices of food items. Any increase in the price of crude oil would impact the Wholesale Price Index (WPI) inflation number commensurately. The government could consider reducing the burden of taxes like excise duty by the Centre and value added tax (VAT) by the states on fuels. However, this would dent revenues and widen the fiscal deficit of the exchequer.
 
While India is becoming increasingly more reliant on US for meeting its energy requirements, there is a need to diversify its portfolio of energy suppliers, and reconfigure its supplier network. India also needs to bear in mind the tendency of US to impose restrictions in the form of sanctions against the actions of the countries that it perceives as hostile to its interests. That said, Iran’s Ambassador to India, Ali Chegeni, welcomed peace initiatives from India to de-escalate the tumultuous situation in West Asia. India should look towards balancing its interests as any escalation may jeopardise its investments in Iran (such as the Chabahar Port), and any adversity of ties between India and Iran may also hamper India’s future energy security and investments in the future.
 
India and the US are two vibrant democracies. Relying on historical kinship with Iran and shared democratic values with the US, India could help build a consanguine entente between the two. The proponents of the nation-first theory need to be imaginative about the opportunities that can be fashioned for trade, commerce, human advancement, and peace.
 
Jay Cheema is partner; Faiza Khan is an associate, Cyril Amarchand Mangaldas