Explained: How Iran sanctions fuelling oil price rise

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Published: April 27, 2019 1:33:05 AM

India was the second-largest buyer of Iranian crude oil after China.

Iran sanctions, oil price rise, oil price, Brent crude prices, US, crude imports, china, iranian crude oil, oil import bill, CARE Ratings The complete embargo on importing oil from Iran will mean that India will have to shift to other markets for sourcing oil. (Reuters)

For the first time since October last year, Brent crude prices touched $75 a barrel as the US has decided to end waivers on the sanction for oil imports from Iran, and Russian production has dropped as well. India sources around 10% of its total crude imports from Iran; the latter is the third-largest source of crude imports for India.

Also read: Your fuel bill set to rise as fuel retailers Indian Oil, BPCL look to recoup losses

India was the second-largest buyer of Iranian crude oil after China. It bought some 23 million tonnes of Iranian crude in 2018-19. Even countries like Japan and Italy are big importers of Iranian oil. The complete embargo on importing oil from Iran will mean that India will have to shift to other markets for sourcing oil.

As the prices of crude rise, India’s oil import bill will also increase. In FY19, India’s crude import bill alone was $114 billion, and the share of crude import was close to 23%. Higher crude prices will push up trade deficit and CAD as the quantity of crude imports is sticky. Moreover, domestic production of crude has dropped from 38.1 million tonnes in FY12 to 35.7 million tonnes in FY18.

Higher oil prices also put pressure on the rupee as the currency fell past the $70-mark to hit an over-seven-week low against a rising dollar. A CARE Ratings study shows that the coefficient between absolute value of exchange rate and Brent between April 1 and 22 was high at 0.62. Sustained increase in the price of oil can move the rupee down by 3-4% on an annual basis, given the dollar has already started strengthening globally. Higher oil prices will push up inflation, and consumers will have to pay more for petrol and diesel.

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