The US has decided to end the six-month waiver it had allowed on sanctions against Iranian oil. The decision will directly affect eight countries – China, India, Japan, South Korea, Taiwan, Turkey, Italy and Greece. India meets 80 per cent of its oil needs through imports, while oil from Iran takes care of as much as 11 per cent of our total oil requirement. Owing to India’s geographical proximity to Iran, procuring oil from that country makes better logistics sense for India. But, not abiding by the US order would mean end of capital and technology transfer to India. Global sales of our companies will be hit. The end of waiver would mean an end of cheap oil for India. Iran was always a good source of quality crude for India. It is a country with which India has had a long and tested relationship over decades. The move will also call to question critical joint projects such as Chabahar port and plans to build roads and railways to connect Afghanistan and Central Asia. End of relations with Iran would also mean weakening New Delhi’s manoeuvrability to deal with Pakistan.
The US wants to squeeze oil exports from Iran down to zero from May. How this geopolitical tug of war is going to play out in the world in the days to come will be under watch. Without going into the merits of the case, the move will certainly trigger a sharp movement in international prices of crude. Prices are very likely to go up. In the short run, US shale output would go up if the global demand for oil increases. The US-China trade war is likely to play dampener in any possible turnaround in the global economy. Second, the US would ask its allies such as Saudi Arabia and the UAE to increase their production quota to make up for the shortage owing to lapse of Iran oil. It is also likely to drive up production by the Organisation of Petroleum Exporting Countries (OPEC) and beyond.
A surge in global oil prices is likely with spin-off effects on India’s oil import bill. The uptick in oil import bills will harm the country’s macros with a widening of the current account deficit. This, in turn, will have a cascading effect on inflation, ballooning of petrol and diesel prices and the weakening of the rupee – a nightmarish scenario for the incoming government at the Centre. India must play its cards wisely. It must keep pressure up on the US to break free from sanctions. India has already made some arrangements to make up for the possible loss in flows from Iran. It must diversify its dependence on oil exporting countries. It should accelerate both supply side and demand side measures to reduce its oil dependency over the long run. Measures such as energy efficiencies, increased use of renewable, and catalysing a shift to electric vehicles must be seriously looked at. Efforts should also be made to increase stagnating domestic oil output. The government can use its diplomatic leverage to get waivers from Iranian oil sanctions while tying up with other less-volatile sources of supply. The Trump regime seems hell-bent on settling for anything less than a regime change in Iran. There will be a prolonged crisis in the Gulf with negative ramifications for global oil markets. India ought to ring-fence its relationship with Iran. It should guard against getting sucked into the Gulf quagmire. It may engage with the US to help it replace the loss of cheap Iran oil. It can also leverage its improved relations with Saudi Arabia and UAE to secure long-term alternatives to cheap Iranian crude.