Uncertainty and shortages have roiled India’s oil markets following the unwarranted bombings of Iranian civilian and military targets launched by the United States and Israel and Iran’s predictable response to that unprovoked attack.
With India heavily reliant on oil imports and anywhere between 30 and 40 per cent of its crude imports and 80-90 per cent of its liquified petroleum gas (LPG) imports sourced from and transiting through the Gulf region, the impact the war is having on the physical supply of oil and LPG and the prices of those supplies is a major shock to the economy.
Globally the war has shaken the world’s oil markets for multiple reasons.
First, the bombing of Iran threatens to shut down its oil production facilities for quite some time.
Since Iran hosts a large oil reserve and was a major supplier to global markets till US sanctions were imposed on the country, that consequence does influence calculations of long-run supply and can therefore impact oil price trends.
Second, since Iran’s response includes shutting off the Strait of Hormuz that is the easiest and most cost-effective route to service anywhere between a fifth and close to a third of the world’s gas and oil demand, the impact on global supply is immediate.
More so because the targets of Iran’s retaliation include oil facilities in many oil- and gas-exporting Gulf states, which are seen as implicitly or explicitly facilitating US-Israeli aggression.
Third, large trading firms, like Vitol, Trafigura, Glencore and Gunvor, which are not necessarily large oil producers, dominate the global physical trade in oil, and are known to be secretive speculators for profit in commodity markets.
This concentrated trade and speculation leads to an amplified impact of the war on oil prices, far beyond what is warranted by any supply shortfall.
This speculative impact is highlighted by the huge volatility that oil prices have displayed around a rising trend.
Finally, this dominance of speculators means that any effort to redress demand-supply imbalances, as is sought to be done through the release from strategic reserves of 400 million barrels of oil by the members of the International Energy Agency, only sends out a signal that the crisis is serious and intensifies speculative activity.
So long as uncertainty prevails, oil prices would soar to levels way beyond the so-called $100 psychological barrier.
Impact on India The impacts from these consequences transmit to the Indian economy through multiple routes.
Given India’s import dependence for crude and gas, there is already talk of shortages that would affect, among others, households using LPG and oil-based means of transportation, truckers, and farmers using oil based fertilizers.....
