Restrictions imposed on importing oil from Iran
The oil market is in ferment once again with a great deal of uncertainty over supplies. On Monday the United States announced that it would not extend beyond May 1 the 180-day waiver it had granted to eight countries, including India, to purchase oil from Iran.
Implication on oil prices
This caused the price of Brent crude oil to witness a sudden jump to more than $75, from last week’s close of $71.97, as traders expected the withdrawal of the waivers to adversely affect the supply of oil in the market.
Other reason for rise in oil prices
The price of Brent crude, it is worth noting, has been rising steadily in the last few months, and has increased by almost 50% since it hit a low of about $50 in December, as a result of the decision of the Organisation of the Petroleum Exporting Countries (OPEC) to restrict their output to boost prices.
Implications on India
- India imports more than 10% of its crude oil from Iran, so the government faces the immediate challenge of having to find alternative suppliers to meet its huge energy needs.
- Even more worrying is the likely negative impact higher oil prices will have on India’s current account deficit and fiscal deficit.
- The current account deficit, which narrowed to 2.5% of GDP in the December quarter thanks to lower oil prices, will likely worsen going forward.
- The fiscal deficit, which has been widening in advance of the elections, is also likely to get increasingly out of control.
What should India do?
If India is to protect its interests in the ever-volatile global oil market, the government will need to take steps to diversify its supplier base and also work towards increasing domestic sources of energy supplies. Opening up the renewable energy sector for more investments will also help avoid over-dependence on oil from the global market to meet the country’s ever-increasing energy needs.
(Adapted From The Hindu)