How the Saudi refinery attacks affect India's oil supply

Last Updated: Tue, Sep 17, 2019 16:29 hrs
Brent

The drone attacks on Saudi Arabia’s oil infrastructure i.e. at the Saudi Arabian Oil Co (Saudi Aramco) facilities in Abqaiq and Khurais, had ramifications worldwide as oil supplies were hit. Estimates put that 5-6% of global oil supplies were affected as a result, which sent oil prices rising. According to Saudi Aramco, the attacks resulted in a “production suspension of 5.7 million barrels of crude oil per day”. Global crude oil prices spiked in the aftermath; going up by 19% to $72/barrel.

India isn’t immune from the effects of the attacks. India is the third largest oil importer and relies on Saudi Arabia to meets its energy needs. It’s the second largest supplier of crude and cooking gas to India. A price increase in global crude prices will affect the country’s trade deficit and expenditure amount on importing oil. For context, in 2018-’19, India spent $111.9 billion on oil imports. Robert Burgess, in a column for Bloomberg writes on how India can be affected as the rupee was the biggest loser in the currency market –

The currency suffered a disproportionate hit not only because India is one of the world’s biggest importers of oil, but because it also suffers from a deficit in its current account. The timing is also not good, with the rupee already under pressure on concern that foreign funds may continue to head for the exits after economic growth slipped”.

The RBI has warned that the country’s current account could take a hit if oil prices continue to rise. Governor Shaktikanta Das, in an interview said in part, “…depending on how long it persists it will have some impact on the current account deficit and further perhaps on the fiscal deficit if it lasts longer”.

Energy security is an important aspect for securing India’s status as a growing economy. However, the current slowdown in economic growth is cause for concern combined with the recent incident in Saudi Arabia. Given that India’s energy needs are primarily met through imports, its vital that a stable output from Saudi Arabia not be disrupted. Higher energy prices affect inflation and stunt growth. Here, the price at which India buys oil is key. India however, hasn’t grown in terms of sustaining itself. The Business Line editorial states that India needs to have a cohesive plan on energy –

India has taken ineffectual baby steps towards energy security in the past decade. Despite much lip service on attracting foreign investments, domestic oil and gas exploration remains a non-starter, with local crude output on a downward curve in recent years”. Currently, India has a storage capacity of 5.3 million tonnes. In June, the government approved construction of an additional 6.5 million tonnes of strategic crude oil reserves.

During 2018-’19, India imported 207.3 million tonnes of oil. India has been trying to develop its own strategic oil reserve in the vein of Japan and US, which has the largest strategic reserve of crude oil to meet two months of its requirement. In India, the strategic oil reserve is maintained by the Indian Strategic Petroleum Reserves Limited (ISPRL).

What complicates matters further for India is in addition to relying on imports for oil, the United States imposed sanctions on Iran and Venezuela’s state-owned oil company Petr?leos de Venezuela SA (PDVSA). India had to limit imports from Venezuela for this reason. Saudi Arabia has assured that supply to India will not be affected. The impact felt by the country will be economic. For every $1 increase in Brent price, the oil import cost for India inflates by $2 billion. The Times of India editorial states that India should take some economic precautionary measures –

Crude price is a factor beyond the control of government. The most important lesson which the government needs to draw from this episode is that it’s essential to focus on the economy. The window for economic reforms provided by low oil prices may not last long. If crude prices do harden and stay at elevated levels, there is a strong economic case to lower elevated taxes on retail petro products”.

There is a lot at stake when it comes to the intersection of diplomacy and economic interests between the gulf countries, Saudi Arabia specifically and India. Recently Oil Minister Dharmendra Pradhan visited Saudi Arabia, United Arab Emirates and Qatar. The company that was targeted also has significance for India. Amid its global IPO, Saudi Aramco is also in the process of buying a 20% stake in Reliance Indiustries’ flagship chemical and refining business in a deal valued at $15 billion. Former Indian ambassador to Saudi Arabia, Oman and the UAE, Talmiz Ahmad, in a column for Livemint, writes on what’s at stake for India in the region –

It has the longest, uninterrupted and most substantial ties with all the Gulf countries. It has an established regional standing for its political, economic and technological achievements. The Saudi side has enthusiastically accepted there are investment opportunities in India “worth $100 billion".

The long-term effects of the reduction in oil supply is yet to be full known. The attacks illustrate how dependent India is on oil imports; which calls for some reform in terms of energy policy for self-sustenance. According to OPEC India’s oil demand will rise the fastest globally in the coming year even as domestic economic growth has slowed down. The projection is for demand to increase by 3.3% next year, outpacing China. This further raises the stakes as far as how India moves forward in terms of energy dependency and sustainability.

More columns by Varun Sukumar