US-Iran stand-off: What will be the impact on oil supplies in India?

Stand-off between the US and Iran is bad news for oil supplies in India as it will increase the fiscal deficit of India by 0.1% of the GDP and could make the situation worse.
Created On: Jan 7, 2020 19:00 IST
Modified On: Jan 8, 2020 17:31 IST
Crude Oil
Crude Oil

In an airstrike, the US has killed top Iranian military Commander Qassem Soleimani on January 3, 2020, and this can directly impact the global oil prices. This stand-off between the US and Iran is bad news for oil supplies in India too. Here in this article, we will talk about how the tensions between the US and Iran will directly impact India. 

Why the Stand-off between the US and Iran is bad for oil supplies in India? 

India is a huge oil-dependent country and imports 84% of its oil needs and roughly about 60% oil from the Middle East. As the tension has arisen in the world’s biggest crude-exporting region, it will have a twin impact on the supply of oil in India as well as globally and the price hike.  

While India has cut down the oil imports from Iran, Iraq is one of the top suppliers. Therefore, military conflict in Iraq will put it’s 4.6 Million barrels production of crude oil at risk and it will have a direct impact on the prices globally and also supply to the Indian market. 

No one knows, how and when Iran would retaliate. Iran's retaliatory measures could be the blockage of the Straits of Hormuz (busiest waterway for the world’s oil industry connecting the Persian Gulf and the Gulf of Oman), which can flare up the oil prices. 

According to ICRA, flare in the international oil prices will have a negative impact on Indian Economy. Every $1 a barrel increase internationally will increase India’s import bill by $1.4 Billion. 

It must also be noted that $10 a barrel increase in crude oil will increase the fiscal deficit (the difference between total revenue and total expenditure of the government) of India by 0.1% of the GDP and could make the situation worse. 

According to the government data, India in the last Financial Year imported 84% of Crude Oil and two of every three of those barrels were from the Middle East. Previously, the crude oil was $65 a barrel and it rose to $70 after the US-Iran Stand-off on Friday. 

On January 2, 2020, Indian Refiners like Reliance, BPCL, etc. bought crude oil at $65.99 a barrel but with the global surge in the prices of oil, Indian refiners will have to pay more per barrel. 

Crude Oil VIX

Crude oil volatility index indicates the expected change in the price of oil within a year. After the top Iranian military Commander Qassem Soleimani was killed, the volatility index of oil inflated to 31.92% directly indicating the rise in the price of oil. 

What do you mean by Oil Crises? 

A sudden increase in the price of oil that is often accompanied by decreased supply. As oil is the main source of energy for most of the industrial economies, an oil crisis can endanger the economy globally. 

Oil Crisis - Post World War 2

The first oil crisis occurred in 1973 when Arabs Members of the Organization of the Petroleum Exporting Countries (OPEC) decides to inflate the oil prices 4 times making it $12 per barrel. 

The second Oil crises occurred in 1979, due to the Iranian Revolution. This is because Iran is one of the major oil suppliers in the world. 

Thus, to sum up, if tensions in the Middle East continue to rise, the oil prices will inflate internationally thus having a negative impact on the Indian economy.  


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