NEW DELHI: US President Donald Trump’s announcement on Tuesday that the country would exit the Iran nuclear deal led to an immediate spurt in global crude oil rates. Having already risen above the $75 per barrel mark (brent crude) last week, prices crossed $77 a barrel on the spot market Wednesday. According to analysts, $80 per barrel is not out of reach in the short to medium term.
The upward trending crude oil rates spells trouble for India, even as renewed sanctions could open up new opportunities in sourcing oil and gas from Iran. According to a report by United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP) and the Indian Council for Research on International Economic Relations (ICRIER), released Tuesday, an increase in the oil prices by $10 per barrel can lower India’s GDP growth by 0.2-0.3 percentage points -- slowing down recovering growth. Simultaneously, higher oil prices if passed on to the consumers would accelerate retail inflation by 1.7 per cent and erode India’s current account balance by as much as $10 billion.
Analysts point out that while India’s current account balance might be stressed, the large reserves of foreign exchange available in its coffers would mitigate that impact. The primary concerns however, remains the viability of passing on the increased prices to consumers. Oil Marketing Companies (OMCs) have already put price increase on hold over the last week, with Indian Oil Corporation’s CMD Sanjiv Singh stating on Tuesday that prices have been put on hold to prevent “panic” among consumers but stopped short of saying the hold on hikes will continue.
For the BJP-ruled Central government, which is heading into a jam-packed election year with the Karnataka polls just three days away, controlling prices by cutting excise duties would result in a revenue hit of Rs 28,000 crore for every Rs 2 cut, according to sources.
But, opportunities exist in India-Iran crude oil trade however. “With US sanctions back, but Europe and the rest still behind the deal, there will be better negotiating opportunities for India. Iran will be looking for partners to compensate lost trade with. It depends on the form the sanctions take,” said a senior OMC executive.