US President Donald Trump is back in the headlines, with his announcement to withdraw from the Iranian nuclear deal and re-impose sanctions on Iran that were lifted in 2015. This has jolted global markets and sent oil prices soaring to a multi-year high.
What is it?
In 2015, China, France, Germany, Russia, the UK, the US and the European Union (EU) inked the Joint Comprehensive Plan of Action or JCPOA with Iran. Under it, Iran agreed to make certain changes to its nuclear programme to ensure that it would be peaceful, in return for the UN, the EU and the US diluting their sanctions against it. Nuclear related sanctions on Iran were lifted by the US effective January 1, 2016. However, Trump criticised this deal in his election campaign and said that he would renegotiate it if he came to power. Last week, he has announced that the US will withdraw from the JCPOA and that US sanctions will be re-imposed on Iran. The other participating nations, France, Germany, UK, EU have expressed disappointment over the move and continue to remain a part of the JCPOA.
Why is it important?
Sanctions on Iran have the potential to fire up oil, which has already been on the boil in recent months. In order to arrest falling crude oil prices, the Organisation of the Petroleum Exporting Countries (OPEC) decided to cut its output by 1.2 million barrels per day (bpd) starting January 2017. In November last year, the OPEC extended this cut until end-2018. Fears of tightening supply after this cutback prompted crude oil prices to breach $60 a barrel earlier this year. The prospect of renewed US sanctions on Iran, the third largest oil producer among OPEC nations, may further fuel this rise.
Iran had significantly increased its oil production ever since the sanctions on it were removed in 2015. Its production has surged 21 per cent from 3.15 million bpd in 2015 to 3.81 million bpd in 2017. It accounts for 4 per cent of global crude oil supply. Now, countries that are keen to maintain their trade relations with the US may be forced to look for alternatives to Iran, tightening global supplies.
With crude oil prices already above $70 levels, a further rise can widen India’s current account deficit, increase inflation and weaken the Rupee further.
Why should I care?
Oil makes up an average of 25 per cent of India’s import bill and the country has increased its oil imports from Iran ever since the sanctions on the country were removed in 2015. Data from the Ministry of Commerce show that India’s imports of petroleum and its products from Iran more than doubled from $4.36 billion in the calendar year 2015 to $9.41 billion in 2017, up 116 per cent. So, if India decides to scale down its purchases from Iran, it may have to look elsewhere for its supplies — probably Saudi Arabia and Iraq, the two nations that contribute most of India’s crude oil imports.
But the even greater concern is the effect this event will have on fuel imports and pricing in India. The rally in the crude oil prices over the last couple of years has already seen India’s oil import bill swell by 33 per cent in 2017 to $101.38 billion. If oil prices surge further, that can make imports more expensive and add to fuel prices at the pump.
The bottomline
If you’ve been nervously watching your fuel bill every other week, this is another reason to worry.
(The article first appeared in The Hindu BusinessLine.)