Rising oil prices a worry for India

Crude oil prices are climbing up, which is a real bad news for India. On Monday, Brent crude oil price, the international benchmark, hit a six-month high of $74.31 per barrel before closing at $74.25/bbl. It closed higher on Tuesday at $74.30 per barrel, a signal of where the oil is heading.

There are several reasons for the price rise. The latest one is the US President Donald Trump's decision on Monday not to exempt India, China, Japan and five other countries from ban on Iranian oil imports. In November last year, the US Government re-imposed sanctions on Iran after it pulled out of the historic 2015 Iran nuclear deal.

It however allowed India, China and the other countries to import oil from Iran by issuing what it called Significant Reduction Exemptions (SREs). These exemptions, which were given for a period of 180-days, would expire next month (on May 2) and the US announced that it would not re-issue SREs with an objective of reducing Iran's oil exports to zero.

Iran is currently exporting 15 million barrels a day. This will be down to zero if the US has its way. As oil prices hinge on demand and supply dynamics, any expected fall in supply will push up oil prices. That's what is happening now and experts say price rise will continue for some time.

India meets 80 per cent of its oil demand through imports and so any rise in oil price will have adverse impact on the Indian economy as it widens current account deficit as well as fiscal deficit. Apart from the ballooning of import bill, rise in oil prices will also have other implications for the country.

However, there is no immediate danger of petrol and diesel prices going up due to higher crude oil prices, as the country is the midst of General Elections and no government worth its salt dare to jack up key fuel prices at this juncture. But any rise in retail fuel prices will stoke inflationary pressures which in turn will take a heavy toll on the poor.

Further, the US' decision to completely ban Iran's oil exports will have more impact on India. Iran is the third largest oil supplier to India after Iraq and Saudi Arabia. India imported 18.4 million tonnes of crude oil from Iran in the first 10 months (April 2018 to January 2019) of last financial year. With the current ban, India will have to search for alternative sources for oil supply.

But one good thing is that the US will take steps to check oil price rise once the full ban on Iranian oil exports comes into force. The US, Saudi Arabia and the UAE, three of the world's largest oil suppliers, are expected to rope in other oil producing nations to increase oil supplies after Iran oil dries up in the market.

But there is no guarantee that the efforts of the US will bear fruit and crude oil prices will be reined in. India needs to reduce its dependence on oil imports and instead focus on alternatives like electric vehicles and renewable energy. That strategy will help the country in long run.