Explainer | Here's how Iran vs Saudi Arabia tussle makes petrol costlier in India

Uncertainty over supply, rising shipping costs, increasing insurance premiums cause rise in crude oil prices

Houthi rebels in Yemen reportedly backed by Iran fired drones and missiles at the heart of Saudi Arabia's oil industry on Monday including at a Saudi Aramco facility that is key to petroleum exports.

What is happening in the Middle East and how does it affect oil?

Iranian and Iran-backed forces in the past have also attacked oil tankers in the Strait of Hormuz and fresh hits by the Houthis on the oil industry in the past few weeks are an eerie reminder of the so-called Tanker Wars of the 1980s that around the same time as the Iran-Iraq war.

Also Read | Drone hits eastern Saudi port, missile targets Aramco facilities: Energy ministry

Attacks on oil production and shipping facilities are widely considered a threat to global energy security and prices of oil as they cause uncertainty over the supply and production of crude oil, increase costs of shipping, insurance and security for tankers.

On Monday, crude oil prices surged to above $70 per barrel -- the highest since May 2020 -- as a reaction to this incident. India's petroleum supplies are heavily reliant on crude oil imports, especially from the Middle East and hence any threat to the security of the oil industry in the region will increase crude oil prices and therefore increase fuel prices in India.

Also Read | Oil prices surge after attack on Saudi Arabia oil site

Has this happened before?

Such a situation however has happened earlier. In June 2019, two oil tankers near the Strait of Hormuz were attacked while transiting the Gulf of Oman amid heightened tensions between the US and Iran. In May 2019, a similar incident had occurred. The US was quick to credit Iran for the attack and deployed over 1,000 additional troops to the Middle East.

Immediately after the incident, the price of oil increased by 4% attributed to reduced shipping and uncertainty over the supply of oil. This uncertainty and security risk also increased the premium for cargo ships, which also have an impact on oil prices. Bloomberg reported that premium for supertankers after the incident in May increased sharply from $50,000 to $185,000.

How does it affect India?

This means higher prices for oil-related products such as petrol for those who rely on oil imports. India, heavily reliant on the Middle East for oil, -- and for whom Saudi Arabia and Iran are the top three sources of oil imports -- is thus very susceptible to changes in oil price that arise out of the uncertainty arising in the Middle East.

A doubling in the price of crude oil over the past 10 months has contributed to record fuel prices at gas stations in India. But taxes and duties account for roughly 60% of the retail price of petrol and diesel in the country,

The record taxes coupled with international rates returning to pre-COVID levels have led to petrol crossing the Rs 100 mark in some places in Rajasthan, Madhya Pradesh and Maharashtra.

Excise duty was raised by Rs 13 and Rs 16 per litre on petrol and diesel between March 2020 and May 2020 and now accounts for more than one-third of the Rs 91.17 a litre price of petrol in Delhi and 40 per cent of Rs 81.47 per litre rate of diesel.

India imports about 85 per cent of its oil needs and local retail rates are benchmarked to international prices.

India's fuel consumption is likely to rise nearly 10 per cent in the fiscal year beginning April 1, as a reflating economy drives petrol and diesel demand, according to Oil Ministry's latest projections.

This will be the fastest pace of fuel product consumption in six years amid record-high fuel prices.

(With agency inputs)