Preparing for winter

The United States on Monday annou­nc­ed a new raft of sanctions, whi­ch the world was awaiting with bated breath over the last couple of months, on Iran and threatened further action to pressure its old adversary. The move is part of a wider effort by US president Donald Trump to curb Tehran’s missile and nuclear programmes, and isolate and diminish the Islamic Republic's influence in the Middle East. The Islamic Republic, which has been making dangerous statements about blocking the strategic Strait of Hormuz and preventing oil exports from the Middle East to the world in retaliation, condemned the move as “economic war” and vow­ed to defy it.

All this do not augur well for a country like India that is dependent on imports for meeting around 80 per cent of its crude oil requirement. New Delhi is also caught in a situation –to choose between the United States and Iran – and wriggling out of it would require serious and concentrated diplomatic efforts. Despite obtaining a waiver from sanctions and making it clear that it would continue buying crude from Iran in the immediate term, India’s problems are far from over. India’s investments in Iran, which includes the strategic Chabahar port and a railway line to circumvent Pakistan and reach Central Asia directly, are likely to come to naught over the next few months.

The larger global concern, however, is the impact on crude prices. The potential blacking out of a key supplier like Iran (and drop of production in Venezuela) has led to spike in crude oil prices over the last few months. As the international oil demand remains unchanged, at about 1.5 million barrels per day, blacking out of a major supplier would make a significant difference to the market.

Further, for India, the issue is a widening trade deficit, since net oil imports contribute to about 40 per cent of its trade deficit. Any increase in crude price, coupled with the rupee’s recent depreciation, would mean 10 per cent rise in oil’s contribution (about 50 per cent) to our trade deficit. As higher oil prices have a direct correlation to inflation, it will have a detrimental effect on the government in an election year.

Traditionally, sectors like airlines, paints and lubricants industries will witness a rise in cost of inputs. Also, the state-owned oil companies may come under pressure if it is asked to share a portion of the government subsidy on crude sales. The impact being felt over a large section of sectors, the stock market is likely to weaken considerably in the next few months.

The impact on India, in summary, is not going to be minimal. The wide-ranging impact across sectors may make the Indian economy vulnerable to forces beyond its control. It’s a timely reminder to policymakers that domestic production of oil and gas should not be under-prioritised. India has not adequately incentivised the private sector to participate in exploration. Some difficult questions are in order, as to what happened to gains of the low-crude years, and why no efforts were made to deploy ONGC’s considerable cash reserves in exploration activity in the offshore fields.

More importantly, given the events over the last decade, it’s important that the government figure out mechanisms to do business with Iran. The famed rupee-riyal mechanism of the previous government, which will probably kick in again, has not really delivered. The bureaucracy has always expected that oil would be given on a barter basis, with India exporting rice and other essentials to Iran. Such mechanisms have limitations. After the closure of the last round of the rupee-riyal mechanism, we were left with $6.5 billion to pay to Iran in addition to their imports.

It’s important to think differently about the way we can do business with Iran and maximise bilateral trade. For example, Iran produces the cheapest power in the world, which can be imported. India has abundant reserves of bauxite and huge alumina factories that convert bauxite to alumina. India’s leading aluminium companies can be incentivised to export alumina to Iran, which can convert it to aluminium in its energy-intensive smelters and export it to the world. There are many other sectors with high-energy consumption that can collaborate with Iran. It’s time to put more innovative barter mechanisms in place to facilitate business with Iran, a historical partner and trusted friend for India in the Middle-East region, in an uninterrupted manner.

 (The writer is CEO of Oakridge energy, a consulting and advisory organisation)