The Philippines was the first to declare a national emergency after Iran choked the Straits of Hormuz. Pump fuel prices had shot up by 177% compared to pre-Iran-war rates. Filipino President Ferdinand Marcos Jr said the measure is designed to ensure even supply of energy and prevent hoarding and black-marketing.
In the US, the average rates have topped $4.14 per gallon in April, the highest since 2022. UK diesel is up 17%, and Europe is averaging 25% higher since the conflict started on 28 February. Many Asian countries like Vietnam are reporting 50% higher prices, and 85 nations now facing fuel driven inflation.
In India, except for premium petrol prices, up about Rs 2.35 a litre, and Jet fuel (ATF) higher by 8.5%, consumers have been spared the hikes for now. For that they have to thank elections in 4 states and one Union territory starting 9 April, and ending 29 April. The Union government, not wanting to upset voters, has lowered excise duty to keep pump prices stable. After the last vote is counted on 29 April, be sure the scenario will change.
The problem is there is no end in sight. A ceasefire announcement by the US and welcomed by Iran has turned out to be a damp squib. Israel has continued to bomb Lebanon and the Straits of Hormuz continues to be closed as Iran insists on a ceasefire in Lebanon. Even if the Gulf waters open up, restoring normalcy for shipping will take weeks if not months. What then are the implications for India?
Dependence on the Gulf
India's dependence on Gulf oil and gas is much higher than the global average. While on a global level the Hormuz Straits is the passage for 20% of crude supplies, India sources 50% of her crude oil, about 40% of liquefied natural gas (LNG), mostly from Qatar, and 90% of liquefied petroleum gas (LPG) through the straits.
Neeraj Mittal, secretary, Ministry of Petroleum and Natural Gas, acknowledged this irrationally high dependence. “The Gulf crisis has shown that what we develop as national infrastructure when things are not as bad as they could be, we forget to plan for adversities. The world’s energy dependence on the Strait of Hormuz is roughly 20%; but ours is more in all three -- crude oil, natural gas and LPG.”
Speaking at an event in New Delhi, Aurelien Kruse, World Bank Lead Economist for India, underlined how the disruption and turmoil in energy supplies had dented the growth momentum for India, though the country had entered the new fiscal year from a position of strength.
Though India had the buffers to prevent the volatility to pass through to retail prices of fuel, Kruse said the volatility would impact growth in the long term. The World Bank now expects significant deceleration from 7.6% growth estimated for the year before the Gulf crisis blew up.
But what we are seeing is not just the impact on shortage of domestic cooking gas and industrial gas. The global supply chain is a complex latticework dependent on timely supplies and stable prices. If any of the strands are disrupted, the cascading effect down the line creates havoc. Even if there is no war, the additional high risk insurance premium on ship cargoes and spiraling freight rates for longer routes via the Cape of Good Hope makes imports more expensive.
Hydrocarbon impact
Oil and gas are not just sources of energy. Hydrocarbons provide the derivatives for fertilizer, plastics, synthetic fibres, solvents, dyes and a host of other products. For instance, 3 key inputs for luggage makers are polypropylene, polycarbonate and polyamide. These inputs together comprise 40-45% of the production costs for hard luggage, and the price surge of 30-50% over the last month has thrown businesses out of gear.
Some estimates put the number of downstream products dependent on oil and gas derivatives at over2,000.
Agriculture too is bearing the shock with fertilizer production hit by shortage of natural gas stocks. Imported natural gas is used for producing urea and other nitrogen-based fertilizers. Any shortage of LNG will impact input prices for farmers, and trigger a rise in food prices, stoking inflationary pressures.
India is pharmaceutical hub too, especially generic drug manufacture. This requires a a complex input side of chemical intermediates, many of which are derived from petrochemicals. Disruptions in supply will delay production, increase costs, and hit exports.
Ditto for electronics and semiconductor manufacture. These are reliant on special chemicals and polymers, which are derivatives of oil extracts. Even small disruptions in these inputs can halt production lines.
There are no short-term solutions; but long-term diversification of energy sources is a must. Petroleum secretary Neeraj Mittal reveals India has been working on this for a while. Now, crude oil comes from 41 countries, up from 27 earlier, while LNG is sourced from 30 nations as against 15 previously. However, a single county, Qatar, is India’s source for 45-50% of LNG and 26-34% of LPG imports.
Strengthening domestic capacity for petrochemicals and fertilizers, and making a harder push for alternative energy is the way forward. Shocks and turbulence in global supply chains have become the new normal, and the faster we develop resilience to volatility, the better we can tackle the uncertain future.