As Trump Says Time Up for Iranian Oil Imports, India’s Economy Straps in For a Rough Ride
In November 2018, the US had granted a six-month additional waiver to eight countries, including India and China, the biggest importers of Iranian oil.
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Oil prices hit $74.30 a barrel, the highest since November 2018, on Monday as the grace period extended by the United States to certain countries to import oil from Iran despite sanctions ends later this week.
In November 2018, the US had granted a six-month additional waiver to eight countries, including India and China, the biggest importers of Iranian oil. Post this period, when the waiver ends on May 2, it would be safe to assume that bilateral relations, including trade relations, with the US would be strained.
The measure comes at the backdrop of the US withdrawing from the nuclear deal with Iran in May, 2018.
“Saudi Arabia and others in OPEC will more than make up the Oil Flow difference in our now Full Sanctions on Iranian Oil,” US President Donald Trump tweeted.
Mike Pompeo, US Secretary of State, too, said that the US has had “extensive and productive discussions with Saudi Arabia, the United Arab Emirates, and other major producers” to ensure the adequate supply of oil. Additionally, he also hinted that the US is increasing its oil production.
All of this would entail significant realignments in India’s oil import dynamics. Imports from Saudi Arabia and Iraq form the bulk of oil that India imports and Iranian oil ranks at number three.
Data obtained from the Department of Commerce seen by News18 shows that oil imports from Iran have increased over the past three years, as compared to previous periods.
Noting the trend, Talmiz Ahmad, former Indian diplomat to Saudi Arabia, UAE and Oman says that the spurt in Iranian oil imports in the past few months “were in anticipation of a US waiver.”
The US’ proclamation is for the future, he added. “This is in view of the ‘zero import’ policy put in place by Trump to exert maximum pressure on Iran so that it comes to the negotiating table for talks on a better Iran deal.”
The scale of oil imports from Iran had dropped in 2010-11 too and remained low till 2016-17. This was during Obama’s tenure when severe restrictions were imposed on Iran post the passing of the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (CISADA).
In 2016, these sanctions were revoked by the US as part of an international agreement to monitor Iran’s nuclear capabilities.
After 2016, data shows that Indian imports of Iranian oil doubled from about 13.5 million tonnes to 27 million tonnes.
Chirag Gupta, Oil & Gas Consultant, PwC India, says that in the next few months, “imports from Saudi Arabia and the US could potentially increase” in view of restructuring supply chains given the restrictions imposed by the US.
“Crude oil imports from Iran could substantially fall… it would probably fall to the levels that we saw before Obama withdrew the sanctions, if not lesser.”
Interestingly, crude oil imports from the US have been on an upward trend since 2017-18. And this is only set to increase. News reports in February, 2019, stated that Indian Oil, the country’s top refinery, has signed a $1.5 billion deal to buy oil from the US.
As for trade relations with Saudi Arabia, the India-Saudi Arabia joint statement in February, during crown prince Mohammed Bin Salman’s visit, mentioned that “His Royal Highness the Crown Prince reiterated the Kingdom’s commitment to meet India’s growing needs for crude oil and petroleum products and substitute for any shortages that may arise as a result of any disruptions from other sources”.
Russia is another possible source, Gupta added “because India and Russia have been looking to further their energy ties.”
Implications of the US policy
“The US does not import any oil from Iran” Ahmad explained. “In fact, now that the US is flush with shale oil and its supplementary demands are being met by Canada and Mexico, it has drastically reduced its import of oil.”
“The US is in a strategically good place to enforce these embargoes because it is not affected,” he added.
India is one among the many countries that are affected, in addition to a host of other US allies like Japan.
“So, this is an extraordinary gesture from a country that is imposing penalties on Iran and is also simultaneously threatening many other countries that are its friends and allies” Ahmad said. “It is selfish and self-centered.”
As regards the direct impacts on Indian refineries, Ahmad says that refineries are built to handle particular kinds of oil, in terms of composition. “Certain refineries are committed to handling Iranian oil like the one in Mangalore.” So, refineries will not be impacted only if the new oil that is supplied is identical and compatible, he noted.
Commercially also, Iranian oil was supplied on competitive terms with a 60-day credit period. “The line of credit is important because these terms of trade are not available everywhere… for example, Saudi Arabia expects payment on the day of supply. Also, the cost of insurance is covered by Iran.”
A few months ago, the US also imposed sanctions on Venezuela and since then, oil imports to India from Venezuela have fallen. And the Iran announcement only further restricts the supply.
Internationally, too, the US announcement caused significant disruptions because of the hike in oil prices.
Ahmad says that the US policy towards Iran’s oil supply is not a sustainable one considering that “Iran has the third largest oil reserves in the world and at a time when the global economy desperately needs oil, only of the biggest suppliers cannot be excluded from the market on a long-term basis.”
Ahmad also makes a political case for evaluating US’ policy with respect to Iran. “Is the US not blackmailing the entire world?” he asks.
“I believe the US has now become a rogue state. It takes actions unilaterally and does not follow international norms. And this has brought a great amount of insecurity to the global economy.”
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