Managing the ordeal of oil price hike

A crude oil train sits parked outside the Philadelphia Energy Solutions refinery owned by the Carlyle Group in south Philadelphia. REUTERS

Is it a double whammy for India regarding the prevailing oil dynamics? The inclination toward the affirmative would be strong. Oil price has spiraled upwards to $77 per barrel of Brent crude oil after a steady rise in its price for the past few weeks. It would put increasing pressure on the country’s import bills, and further emaciate the country’s exchange rate. The average inflation rate or price level also risks being bolstered northward than what it is. The country’s exchange rate is hovering around Rs 67 per dollar.

Furthermore, American President Donald Trump has arbitrarily decided to renege on the Iranian nuclear deal and to proceed to re-impose economic sanctions on Iran. He has insisted that the current deal between Iranand America-led western powers is somewhat lax and risks enabling Iran to revert back to its nuclear capability programme. That has reinforced the spectre of further rise of oil prices at the global spot market. India imports huge quantities of oil from Iran.

The prevailing scenario has brought to fruition the cautions of the country’s Chief Economic Advisor (CEA), Arvind Subramanian. In the “Economic Survey”, just before the presentation of the national budget, Subramanian had expressed wariness regarding the high risk to India from further skyrocketing of oil prices in the near future. From ongoing trends in the beginning of February, such an aftermath seemed impending, unless necessary correctives were applied in global economic relations; it was not.

Oil supply reduction by OPEC countries, a revival of global economic headwinds with its associate increase of average global demand for oil, has resulted in a propelling upward of oil price. The global market clearing oil price equilibrium has been pushed higher than before. Additionally, how would the Indian economy – growing at a rate of about 7%, at present, - react to Trump’s potential sanctions against Iran? This geopolitical factor, at present, could further exacerbate matters for the country’s principal economic constituents: inflation, employment, Gross Domestic Output (GDP), and nominal interest rates.

A crucial input for a country’s energy needs is oil. It is among the most required commodities for India, which is endeavouring to propel its economic growth to a consistent, high normal. The task of so doing is being undertaken amid cropping up of structural challenges, intermittent difficulty of maintaining a reasonable harmony among economic indicators, and external economic shocks.

To ensure the least undesirable from oil price wariness, India, despite purchasing oil in huge capacities from Iraq, Saudi Arabiaand Iran, has also worked to pave the way for oil transactions with Venezuela, Canada, and from America. But, an arrangement entailing a vibrant, yet harmonious distribution of oil purchases from all aforementioned countries is still at large. This country is still somewhat overly dependent on the three Middle-Eastern countries for the supply of its oil.

From $54 per barrel of Brent crude in March, last year, the cost per barrel of it has increased by nearly $25. Such a leap in price increase within one year has not been witnessed since 2014. It is stated to be poised for its fourth consecutive quarterly gain; this continuous pattern of oil prices rise has not been observed for the past ten years. Nevertheless, the American West Texas Intermediate crude oil futures have increased by 42 cents to $71.56 per barrel. But, that is of scant comfort for most sectors of the Indian economy, because the country mostly purchases Brent crude oil.

India has a friendly relationship with Iran. Moreover, the economic ingredient in diplomacy between the two countries have been emphasised more than those of the other constituents; in it, oil occupies a paramount priority. If new sanctions are imposed on Iran, a parapet of stability in world politics would be disturbed.

A hostile stalemate-like situation would manifest in Iran’s relations with America and its allies in Europe. But,Iran is bound to score the extra moral point, for the time being. Other major powers and economies such asIndia, China, and Russia might find ways to get round the sanctions to continue to do business with Iran. Indian exports to Iran and imports from Iran are not likely to get affected in too adverse a manner.

If economic sanctions were to be imposed upon Iran, would that be taken in its stride by India? This country is the third largest purchaser of oil among the comity of nations. In the past financial year, of the 44.6 lakh barrels per day purchased by India, 4.58 lakh barrels per day was from Iran. This year, the amount has been targeted to be increased to 5 lakh barrels per day of Iran’s oil. Would Iran provide an attractive rate to India to increase its sale of oil to this country as a consequence of the America-led potential economic embargo? If so, that would provide some relief to this country’s about-to-be increased oil bills. If not, the prospective economic tasks would get relatively more strenuous.

Possible rise in oil prices is bound to have its spill over effect in the Indian market through a rise of the country’s level of inflation. The burden would definitely fall upon consumers. Inflationary estimates would rise. That would demand some cost cutting. In that case, the expected nominal interest rate lowering by the Reserve Bank of India (RBI) would be elusive. RBI’s control of money supply through monetary policy would remain stringent.

If so, the scope for greater increase in investments, manageable depreciation of Indian currency, consequent boost of Indian exports, improvement of the Current Account – difference between exports and imports – additional boost to aggregate demand and further increase of the country’s GDP, might get relatively decelerated than otherwise.

However, further reforms of various sectors of the Indian economy are being undertaken. Therefore, the capacity to better manage possible shocks and stresses need not be unduly undermined. Skilled, bona fide negotiations, effective economic management, wise policies, and diligent effort would surely contribute meaningfully to propel the country’s economic growth to greater heights.

(The writer is an anlyst on
international finance)

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