Will Trump’s Iran Sanctions Give Me a Thin Wallet & Fat Fuel Bill?

Trump’s Iran sanctions have sent the global oil market into a tizzy. India, China are likely to bear the brunt.

Image of Donald Trump used for representational purposes.

(Photo: The Quint)

Oil prices have been gradually going up for a while. The average price of the Indian basket of crude oil in 2017-2018 was at USD 56.4 per barrel. In April 2018, the average price was at USD 69.3 per barrel. In late April, the price of the Indian basket of crude oil crossed USD 70 per barrel, the first time since November 2014, when it had averaged at USD 77.6 per barrel.

On 7 May 2018, the price stood at USD 71.60 per barrel.

If this wasn’t enough, American President Donald Trump has reintroduced nuclear and economic sanctions on Iran. 

Iran is the fifth-largest oil producer in the world and the third-largest within the Organisation of the Petroleum Exporting Countries (OPEC) – the oil cartel.

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Concerns Regarding Trump’s Iran Sanctions

Iran produces 4 percent of the global oil output and sanctions against it are bound to push up the global oil price.

A Reuters report points out that the country produced around 3.81 million barrels per day in March 2018. During the period January to March 2018, the oil exports of Iran averaged to over 2 million barrels per day.

During the same period, the International Energy Agency estimates that the global oil demand had stood at USD 96.5 million barrels per day.

With the US sanctions on, it is more than likely that other countries will stop importing oil from Iran, and in the process drive up global oil prices.

There are multiple points that arise here:

• In the past, when supply was a problem, Saudi Arabia used to act as the global swing oil producer, ie, it increased oil production and prevented oil prices from going up. This was primarily done to ensure that high oil prices do not make other forms of fuel viable. Something like that is unlikely to happen presently, simply because Saudi Aramco, the biggest oil company in the world, is coming up with an initial public offering (IPO). And it is in Saudi Arabia’s interest that oil prices continue to remain high, so that the IPO gets a higher valuation. Given this, as far as American sanctions on Iran are concerned, they might end up acting in favour of the Saudi Aramco IPO. Also, with Saudi Arabia unlikely to increase supply, the higher trajectory of oil prices is likely to continue.

Further, the threat that Trump will penalise those countries which support Iran, will build in some geopolitical risk premium into the price of oil.

Why India Will Bear the Brunt of Trump’s Actions

• The other important point here is how seriously countries take the American sanctions on Iran. China is Iran’s number one oil customer and it is unlikely that the country will fall for Trump’s bullying. India is Iran’s number two oil customer. An April 2018 news report in The Times of India points out that in the last financial year, Indian Oil Corporation, Mangalore Refinery and Petrochemicals, Bharat Petroleum and Hindustan Petroleum, imported 2,05,600 barrels per day from Iran. In the current financial year, the plan is to import a much higher 3,96,000 barrels per day, the Times report suggests.

It remains to be seen how the Modi government takes to Trump’s bullying. If it decides to stop buying oil from Iran or cut its procurement, India will have to pay a higher price while buying oil from other sources.

Even if the government (through the government-owned refineries) continues to buy from Iran, it will have to pay a higher price for the oil that it imports from other parts of the world.

India’s import dependence or the proportion of the total oil consumption that it has to import, has been going up over the years. In 2014-2015, India imported 78.3 percent of the oil that it consumed. By 2017-2018, this had risen to 82.8 percent.

This basically means that India will have to pay a higher price for the oil that it imports in the period to come. What also does not help is the fact that the rupee has been weakening against the dollar.

At the beginning of the year, one dollar was worth around Rs 63.7. Currently, it is worth Rs 67.4. This means Indian companies which import oil, will have to pay more rupees –than was the case in the past – against the dollars needed to buy oil. Oil is bought and sold internationally in US dollars. This will push up the trade deficit and put further pressure on the rupee.

Link Between Elections & Oil Prices

The big question is, will higher oil price translate into higher prices of petrol and diesel? The oil price currently is lower than where it was when Narendra Modi came to power in May 2014. The average oil price during that month was at USD 106.85 per barrel. But petrol and diesel prices back then were lower than they are now.

This is primarily because the central government taxes as well as taxes collected by the different state governments on oil (in many cases) have gone up, between then and now.

Given that consumers did not benefit as much as they should have from lower oil prices, it is only fair that the governments now share some of the burden of higher oil price, and cut taxes on petrol and diesel.

But is that going to happen? The central government is fairly stretched on the revenue front. In 2018-2019, it has set itself a central GST target of more than Rs 50,000 crore, a month. The collections in recent months haven’t been anywhere near that number. Hence, it is clearly not in a position to cut taxes on oil.

At the same time, several state assembly elections as well as the next Lok Sabha election, are scheduled over the next one year. In this environment, market based petrol and diesel prices, are politically a bad idea. So, what is the way out?

The government will essentially ask the oil companies to bear the cost of higher oil price and not increase the price of petrol and diesel. This is precisely what the previous Congress-led UPA government did.

This has also been happening in the run up to the assembly elections scheduled in Karnataka (on 12 May 2018), with oil companies not raising petrol and diesel prices, over the last two weeks.

Hence, petrol and diesel prices will rise in general, but not during a period when elections are scheduled in a particular state.

(Vivek Kaul is the author of ‘India’s Big Government—The Intrusive State and How It is Hurting Us’. This is an opinion piece and the views expressed above are the author’s own.The Quint neither endorses nor is responsible for them.)

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