Price climb likely, but no fuel shortage if Iraq unrest persists

Shwetank Shekhar Dubey/ZRG

As Indian markets continue to fluctuate, the impact of ongoing Iraq crisis here looks muted with fears of shortage of petroleum products largely unfounded. But pruning of fuel subsidy bill sure will have to wait.

The Iraq crisis has escalated with another town falling into the hands of ISIS. However, even though the Sensex witnessed a sharp fall after 12pm it later recovered and closed at 25,246.25 with the Nifty following the trend and ending trading at 7558.20.

Experts say that while the Iraq unrest will impact India financially due to a sharp rise in global oil prices, it is a short-term problem and will not translate into a shortage of petroleum products.

The potential escalation of the Iraq crisis may impact global oil supplies meaningfully, says Kotak Institutional Equities report. India’s crude-oil imports from Iraq are about USD20 billion annually.

IV Subramaniam, Director of Quantum AMC said that India would face problems of high oil prices and deficits will go up. However, there is no immediate threat of Brent crude going above USD120 a barrel, says Ajay Srivastava of Dimensions Consulting. Brent Crude surged to USD113.10 per barrel on Tuesday.

The unrest in Iraq could derail automatic deregulation of diesel pricing and even hamper the Narendra Modi government’s hopes of pruning the subsidy bill. Increase in crude oil price has a direct impact on domestic prices of petrol, diesel, cooking gas and kerosene. This has an adverse effect on inflation and finally the citizens have to bear the brunt of it. Fuel subsidy was Rs 1,12,000 crore last year.

Paris-based International Energy Agency (IEA) has played down fears over the possible loss of oil exports from Iraq, saying that supplies did not appear to be at risk for the moment. Northern Iraq accounts for a small part of the country’s oil production as such parts have been shut since March 2014 due to disruption of the northern Kirkuk-Ceyhan pipeline. Iraq now exports mostly from south of Baghdad, while exports from the north are considered safe for the moment as the major Kirkuk oil hub is held by Kurdish forces.

The situation is being watched closely by Indian refiners like Indian Oil Corporation, Reliance Industries and Essar Oil, which buy Iraqi crude. Iraq is the second largest supplier to India with its exports reaching 25.04 million tonnes in 2013-14, the largest being Saudi Arabia with 38.08 MT.

While India’s crude imports from Iran were up significantly in the first few months of this year, its refiners have signed contracts for lower purchases in the coming months. Exact numbers are not immediately officially available.

The US Energy Information Administration reported that in 2013, the estimated consumption of crude oil by India was 36,21,750 barrels per day, however the total oil production was only 9,82,200 barrels per day.

Even though domestic production has stagnated in recent years, Indian oil companies are increasingly purchasing equity stakes in overseas oil fields to counter any problems in the long run. In 2013, government sources had said that to diversify its crude sourcing portfolio, India would go the China way. Chinese National Oil Companies (NOC) have been investing in overseas assets and signing long-term supply contracts. Chinese companies have invested USD17 billion since 2010 in North America alone.

In May 2014, Russian President Vladimir Putin and his Chinese counterpart, Xi Jinping, agreed on a 30-year energy agreement, estimated at USD400bn.

However, even though Indian oil companies are also acquiring assets overseas, they are far more cautious and the time taken for imports to start is longer. Officials say the moment competitors learn that Indian NOCs are interested in a particular asset they get aggressive as India is known to be a cautious player.

As far as India is concerned, over 60 percent of its crude requirement is met from West Asia. But observers say refinery configurations and guidelines that public sector refiners have to follow for imports can prove to be a restriction.

While India had 5.5 billion barrels of oil reserves in 2012, the Indian Strategic Petroleum Reserves is implementing projects at three locations — Visakhapatnam (1.33 million tonnes), Mangalore (1.5 million tonnes) and Padur (2.5 million tonnes) — which are expected to be commissioned from 2014.

India spent over USD125 billion on oil imports last year and a surge in prices will also hurt the economy as the crude import bill will have to be increased. Any increase in oil imports increases India’s oil import bill, at a staggering USD145 billion a year thereby putting pressure on the country’s current account deficit (CAD). India’s has managed to rein the CAD to less than 2% of GDP in 2013-14 from a record 4.8% in 2012-13.

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