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Expert Analysis on Iraq Crisis: Is ‘Oil’ well for the Indian economy?

Romiya Das, DailyBhaskar.com | Last Modified - Jul 10, 2014, 04:41 PM IST

The flame of Iraq crisis has already affected many economies, and could also reach out to adjoining borders
  • Expert Analysis on Iraq Crisis: Is ‘Oil’ well for the Indian economy?
    Expert Analysis on Iraq Crisis: Is ‘Oil’ well for the Indian economy?
    New Delhi: Islamist Militant group ISIS had given birth to a wide-ranging crisis in war-torn Iraq; where leeway of arriving at normalcy in the near future appears very slim.
    Most feared by the countries across the world, in wake of a scenario which can be best described as “Burning Iraq”, is the affect of sectarian violence on the country’s oil reserves.

    However, the burning question is - “Whether the sectarian violence in Iraq have any impact on the Indian economy?”

    Nouri al-Maliki ruled Iraq, stands second among the 12 largest oil exporting nations in the world, and is also part of the OPEC. India is presently one of the biggest importers of oil from Iraq. And, the heaving crude oil prices may generate analogous predicament, seen in 2003 and 1991.

    Besides oil, the emergent clout of political, diplomatic and terrorist activities in South Asia is a matter of concern.

    The flame of Iraq crisis has already affected many economies, and could also reach out to adjoining borders. Even India finds itself gripped in the brunt. India’s prime concerns include:
    · Safety of Indians working there
    · Impact on the Indian economy with the speculated rise in oil prices - if sectarian violence engulfs Iraq completely.

    Economic spill-overs
    The turmoil in Iraq has mounted India`s crude oil basket to $115 per barrel, which is the highest in the last nine months. Oil prices have a direct impact on India, as it is the largest importer of oil from Iraq after Saudi Arabia. The government imported 13 per cent of the required oil last year, and plans about 20 per cent import this year. Meanwhile, the boost in the oil prices will increase the import cost, further adding the burden of subsidy. Hence, the expenditure on oil will increase.

    India may not be affected?
    However, some reports claim that India wouldn`t be affected by the Iraq crisis, because the oil reservoirs from which it gets its supply are not yet taken over by the rebel groups.

    Talking to Daily Bhaskar over phone Surya Gangadharan, veteran defence expert said, “We draw only around 13-14% of our oil from Iraq. Bulk of it comes from Saudi Arabia and other places. We have long term contracts with these countries. So, there is no immediate problem. Only thing is that if the crisis continues, then the prices could go up.”

    On asking about the Iraq crisis impact on other countries across the globe he added, “There will be many other countries like Pakistan, Bangladesh, and the entire neighborhood in fact. China may also be affected to some extent because they are also getting a substantial quantity of oil from those places. There is going to be huge worldwide shock and prices of everything will go up. In fact, many of the economies of Europe, which are now struggling to survive; they could be seriously hit by any blockage of energy supply from this region.”

    Indian Oil and Hindustan Petroleum are planning to procure 374,000 barrels per day of oil from Iraq this year. Stock market has also witnessed a downfall. And, on the expected lines the Indian rupee has also witnessed a steep decline in the past few days. Speculations are rife that rupee may touch $70 mark soon.

    In case ISIS takes overall control of Baghdad, making Iraq Prime Minister Nouri-al-Maliki step down from his position, this would encourage other terrorist groups as well. The situation in Taliban strong holds such as Afghanistan and Pakistan may also deteriorate, becoming a cause of further concern for India.

    The diesel price will also shoot up with the rise in crude oil prices. India buys crude oil at $111.25 barrel, import costing around Rs 6,688 per barrel. If the oil mounts to $120 a barrel, it will cost about Rs 7,200 a barrel to India. Also, diesel price will see a Rs 5 increase per liter.
    Tough days ahead for Indian OMC`s

    According to an article ‘How Iraq unrest can impact you’ published in The Economic times stated that Oil Management Companies (OMC) like Indian Oil, BPCL, HPCL and ONGC stock will probably steep down. The first three companies will never be able to recover from the upturn in oil prices while ONGC's will face the subsidy burden.

    ONGC's subsidy burden in fiscal year 2014 was Rs 56,384 million that is one third of its total revenue. Companies like RIL and MRPL will not have much impact as they sell petrol and diesel on the global prices.

    In the wake of Iraq crisis government will have much less choice to deal with economic conditions. The government can decontrol diesel, but it will not be able to stop the price hike. Keeping the prices intact will increase the subsidy burden. In addition, no increase in the price will be bad for the investors. Impact on oil stocks will encourage the government to take more credit and interest rate will remain elevated. Diesel and petrol price hike will have an impact on other objects. Price of bus and airplane tickets will get momentum. Also grains, vegetables and fruits prices will increase.
    [Image: Iraq soldiers outside oil refinery]
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