From Gaza To Gas Pumps: What Israel-Hamas Conflict Entails For India's Oil Requirement?
The Israel-Hamas war in Gaza has raised concerns among experts about the potential of price rise in the global markets. India, as the world's third-largest oil consumer, is particularly susceptible to these economic shifts.
With 85 per cent of its oil supply being imported, India's significant dependence on oil from the Middle East is a matter that experts find concerning. This crisis has prompted discussions about India's energy security and the need for diversification of its energy sources.
As Martand Jha, Research Fellow, Center for Russian and Central Asian Studies, JNU said, "If Iran gets more engaged in the ongoing conflict, this war might spiral out of control. There are high chances of the entire Middle East going into a much deeper crisis. If such a situation arises, it would deeply impact oil and energy prices."
Jha added that this will hurt the Indian consumer majorly as the country is not in a position to take any steps to curtail this war. India can only hope that things get better, he mentioned.
Rishi Gupta, Research Fellow, Asia Society Policy Institute, New Delhi emphasised the importance of India's diplomacy in managing this crisis. He stated, "India has already begun diversifying sources, reducing its heavy dependence on Iran and exploring alternate energy solutions to lessen the impact. Still, an immediate cost will be involved, directly affecting people."
India's vulnerability stems from the fact that about 60 per cent of its oil comes from the Middle East and approximately 70 per cent of public sector refineries' oil imports are through term contracts, with the rest being spot purchases. Experts said that the country may need to look for alternate suppliers if the dispute goes beyond its term contracts with suppliers, which might have an impact on the economy.
Indermit Gill, Chief Economist, World Bank warned, "The latest conflict in the Middle East comes on the heels of the biggest shock to commodity markets since the 1970s—Russia's war with Ukraine. If the conflict were to escalate, the global economy would face a dual energy shock for the first time in decades, not just from the war in Ukraine but also from the Middle East."
India's strategic petroleum reserve, with only enough crude oil supply for 9.5 days, underscores the need for more comprehensive energy security measures. Private companies, on the other hand, have a cumulative reserve capacity of 64.5 days. In comparison, the US, China and Japan boast significant strategic oil reserves, providing them with a buffer against supply disruptions.
To mitigate these risks, at the G20 meeting in New Delhi in September 2023, India, along with the US, Saudi Arabia, UAE, France, Germany and Italy signed a memorandum to develop the India-Middle East-Europe Economic Corridor (IMEEC). This initiative aims to enhance regional energy security and reduce India's dependence on the Middle East for its energy needs.
However, as Gupta points out India's journey towards energy security and diplomatic engagement in this complex global geopolitical contest is a continuous process. “While India's underlying strengths may not match those of the United States and China, it certainly knows how to navigate its way through these challenging times,” he added.
Furthermore, the International Monetary Fund (IMF) has noted that possible disruptions to the oil supply might have lasting repercussions. According to IMF projections, there may be a 0.15 percentage point decline in global growth for every 10 per cent increase in oil prices.
Rising energy costs can have an effect on economic activity in addition to making it more difficult for central banks worldwide to control inflation. The IMF stated that a 10 per cent increase in oil prices globally is estimated to have the potential to raise global inflation by 0.4 percentage points.
Last week, the World Bank warned that a major escalation of the war between Israel and Hamas, one that spilled over into a broader Middle East conflict could send oil prices surging as much as 75 per cent.
Global oil prices, which are now averaging about USD 85 per barrel, are predicted by the World Bank to average USD 90 per barrel this quarter. The organisation had previously projected a decline in oil prices for the next year, but disruptions to oil supplies could drastically alter those forecasts.
Officials from the World Bank issued a warning and stated that the impact on inflation and the world economy will be contingent upon the duration of the conflict and the persistence of high oil prices. Gold, industrial metals and food costs may all rise if rising oil prices continue.
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