Oil’s not well

The latest crisis in Saudi Arabia could not have come at a more inopportune time for India, which is reeling under the impact of economic downturn

AuthorPublished: 18th Sep 2019  12:06 amUpdated: 17th Sep 2019  10:21 pm

The unprecedented drone attack on the heart of Saudi Arabia’s energy industry has knocked out half of the country’s oil production, a development that is bound to have far-reaching global implications not just on crude oil prices but also on the geopolitics. India cannot remain immune to the fallout as it is largely dependent on crude oil imports to meet its growing energy demand. The prices of diesel and petrol are bound to skyrocket in the coming days with a cascading effect on the economy. State energy producer Saudi Aramco lost about 5.7 million barrels of output on a single day when 10 unmanned aerial vehicles struck the world’s biggest crude-processing facility in Abqaiq and the kingdom’s second-biggest oilfield in Khurais. For oil markets, it’s the single worst sudden disruption ever, surpassing the loss of Kuwaiti and Iraqi petroleum supply in August 1990, when Saddam Hussein invaded his neighbour. It also exceeds the loss of Iranian oil output in 1979 during the Islamic Revolution. Irrespective of what happens next on the region’s geopolitical front, it is India that is going to bear the brunt of the surge in international oil prices. India is one of the world’s biggest buyers of oil, with imports accounting for 85% of the total crude oil requirements. Saudi Arabia accounted for about 18% of crude imported in 2018-19. The latest crisis could not have come at a more inopportune time for India as it is already reeling under the impact of economic downturn while its currency is also under pressure. And, higher oil prices tend to hurt the economy as consumer costs rise.

Though Petroleum Minister Dharmendra Pradhan has said there would be no disruption in oil supplies, the impact is most likely to be felt in terms of trade deficit, on the markets and on the Indian basket of crude oil prices and exchange rate. There are worries that if the international oil prices continue to stay high, it could impact India’s current account deficit (CAD), which occurs when a country spends more on its imports than it earns from exports. Currency fluctuations also cannot be ruled out. The sectors that are sensitive to fuel price changes are already a worried lot. Also, sales of automobiles, which are already in the slow lane, could take a further dip if fuel prices increase. The aviation sector also appears to be heading for turbulence. Already, the aviation turbine fuel (ATF), which accounts for the largest variable cost of any airline, is heavily taxed and in the event of prices further going up, the airlines may be forced to pass on the additional burden to flyers, further affecting domestic growth in the sector.

 


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