With every dollar hike in oil price, the import bill increases by around Rs.10,700 crore annually. So, now we can understand how important role oil prices play in deciding the current account’s trade deficit.
The attack that shocked the world
On Sept. 14, 10 drones targeted Saudi Arabia’s Abqaiq oil refinery and Khurais oil refinery belonging to the state-owned Aramco. Abqaiq is Saudi Arabia’s largest crude processing facility, with an installed capacity of 7 million barrels per day(mbd) and utilized capacity of 5.7mbpd. Khurais has 15mbpd production capacity and is the second-largest oil field in Saudi Arabia. The kingdom’s usual crude oil production is about 9.8mbpd, of which about 7mbpd is exported. This attack has resulted in a suspension of 5.7mbpd of supply, which is above 5% of the world’s oil supply.
Saudi Arabia is the 2nd largest exporter of crude oil and natural gas to India, and thus the attack is a concern for India not just from the security viewpoint, but also economic.
Responsibility of attack
The attack has been claimed by the Houthi rebels of Yemen, these are the rebels who are supported by Iran in their war in Yemen against the combined forces of Saudi Arab and the UAE. While the Houthi rebels have taken responsibility, US President and others in White House have indicated that they believe the attack has been carried out by Iran and this has escalated the tensions further in the region.
What are the implications?
On Indian Economy
In the aftermath of the attacks, analysts forecasted an increase in global oil prices of between 10% and 15%, even though immediate supply-side disruptions may be averted. Brent crude, the international standard, surged $7.84 per barrel, or 13%, to $68.06 per barrel after the attack. India is the third-largest importer of oil in the world. Any spike in global crude prices will weigh heavy on India’s trade deficit. India spent $111.9 billion on oil imports in 2018-19. In this financial year ending March 2020, India imported 4.5 million barrels per day (MB/D) of crude oil between April and July.
In the short run, the disruption is not expected to be significant as Indian refiners maintain 65 days of crude storage and when added to the strategic reserves, that takes the Indian crude coverage to 87 days.
But, if the Aramco is not able to revive its capacity in the duration as stated by its officials, then there may be a serious concern for India. Moreover, with the Indian Economy going through a slowdown, it will add to the burden of inflation on the RBI which has consistently kept the inflation rate within 4% as mandated.
On International Peace
The attack on Aramco has disrupted further the already existing tensions between America and Iran. While Iran has clearly specified that it is not involved in the attack, the sophistication of the attack has led to the US believe that Iran is involved in the attack. Also, the support of Iran to Houthi rebels has been one of the reasons that America has placed sanctions on Iran.
The Secretary of State Mike Pompeo has stated that the US considers the attack as ‘act of war’, further Donald Trump has also escalated the rhetoric by stating that the US is ‘locked and loaded’. Thus, the attack has hiked the geopolitical tensions in the region.
What does India need to do?
With rising tensions in West Asia, India needs to diversify the supply of crude oil. Out of 227mmt crude oil that was imported in 2018-19, 64% was sourced from the world’s top five producers; Iraq (46.6mmt) topped the list, followed by Saudi Arabia (40.3mmt), Iran (23.9mmt), UAE (17.3mmt) and Nigeria (16.8mmt). The rest was imported from well-diversified sources, including the US (6.4mmt). Thus, India is already on move to diversify the sources of import, it needs to focus on it more effectively.
Increase the strategic reserves
Indian Strategic Petroleum Reserves Limited (ISPRL) is an Indian company responsible for maintaining the country’s strategic petroleum reserves. ISPRL maintains an emergency fuel store of a total of 5.33 MMT (million metric tons) or 36.92 MMbbl of strategic crude oil enough to provide 10 days of consumption. Strategic crude oil storages are at three underground locations in Mangalore, Visakhapatnam, and Padur (Udupi, Karnataka). All these are located on the east and west coasts of India which are readily accessible to the refineries. These strategic storages are in addition to the existing storages of crude oil and petroleum products with the oil companies serve in response to external supply disruptions. India has planned to set up more strategic reserves, the target is to reach a level of 15.33 million tonnes. Thus, India needs to work faster on improving the strengths of reserves to meet unexpected situations.
This attack also exposes the vulnerability of major installations to the new form of attacks using drones. India should immediately revise its security installments and preparations to protect its major installations such as oil refineries, nuclear power plants, etc. The rise of war across the globe must be taken into consideration as a new threat, and for India, it is not something new, as we have been victims of proxy war for decades.
What next for the world?
The insecurities in the Middle East are a grave concern for the entire world. Though several countries have condemned the attack, the need is to ensure that peace is established in the region. The Nuclear deal between Iran and P5+EU was a step taken towards establishing peace and withdrawal of the US from the deal has only hiked the tensions in the region. The need for the day is a Multinational approach among countries to solve issues that pose a threat to the societies and the World.
The major disruptions impacting economy today namely, the US-China trade war, Hongkong Crisis, Iran-Saudi-US tensions all can be solved if nations and leaders pledge to establish peace. In the words of Martin Luther Jn. “It is not enough to say that we must not wage war, it is necessary to love peace and sacrifice for it.”
- The Hindu- Business Line
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