Oil is simmering again, and Brent has breached the psychologically important mark of $70 a barrel. The latest trigger for the flare-up is the US move to end the six-month waiver given to eight countries including India for oil imported from Iran. The US wants to squeeze oil exports from its bête noire Iran down to zero from May. How this geopolitical tug of war plays out in the coming weeks and months needs to be seen. Several countries, including the European Union nations, are not on board with the unilateral pullout by the US from the Iran nuclear deal and its re-imposition of sanctions on the country. Meanwhile, the price spike spells bad news for India that depends on imports for more than 80 per cent of its crude oil needs. Yet again, a surge in the oil import bill threatens to harm the country’s macros, with a widening of the current account deficit, weakening of the rupee, increase in petrol and diesel prices, and rising inflation. Indian refiners have reportedly tied up alternative sources of oil supply to make up for the possible loss in flows from Iran. So, the wheels of the economy should remain oiled. But at what cost, is the moot question.
Oil is notoriously fickle, and trying to forecast its movement has always been a mug’s game, with multiple global factors, uncertainties and speculative forces at play. From $45 a barrel in June 2017, Brent nearly doubled to $85 a barrel in early October 2018, then crashed to under $50 a barrel by end-December only to rise again to about $74 a barrel now.However, a few factors should hopefully put a cap on the fuel’s prices. One, US shale oil production and exports should rise significantly with a steep rally in global oil prices. Also, the global economy is not in great shape; this along with the US-China trade dispute could keep demand for oil subdued. Besides, the US has indicated that it along with its allies Saudi Arabia and the UAE will step in to make up for the loss of Iranian oil from the global markets. That said, nothing can be taken for granted. This latest bout in the US-Iran dispute entails the risk of major escalation if Iran follows through on its threat of closing the strategic Strait of Hormuz if it is prevented from using the waterway to export oil. That could snowball into military conflict and oil supply shocks that will send prices zooming up.
India will have to play its cards carefully. While continuing efforts to obtain waivers from the Iran oil sanctions and also tying up other less-volatile sources of supply, India should accelerate both supply side and demand side measures to reduce its oil dependency over the long run. India needs to focus on energy efficiencies, increased use of renewables, and catalysing a rapid shift to electric vehicles. On the supply side, concerted efforts should be undertaken to increase stagnating domestic oil output.