What's Plan B for Iran PDF Print E-mail
Saturday, 07 January 2012 02:53
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Supply shocks, crude price and subsidy spiral

Though close to 60% of India’s oil imports come through the Strait of Hormuz, it’s not clear whether we have a Plan B in case Iran is able to make good on its threat to close off the Strait if the new lot of trade sanctions are not revoked. While China has already cuts its purchases from Iran and Japan is planning to do the same, India continues to scramble to find a means to make payments to get around the US sanctions—the Turkish bank through which such payments were being made has said it would no longer be able to make payments (around 8% of India’s oil imports come from Iran). The situation remains fluid since, while the US has a strong naval presence in the region to keep the Strait open, Iran has just announced a new set of naval exercises in the Strait.

In the event that there is a problem, India’s strategic reserves of around 50-60 days—including supplies of crude oil and various petroleum products as well as the stock that is in process—will provide a buffer. While there is little that can be done for supplies from Iraq (7.7% of Indian oil imports in 2010-11 came from here), Iran (8.1%), Kuwait (8.4%), UAE (8.1%) and Qatar (5.2%), there could be some hope from Saudi Arabia (15.5%). Though the bulk of Saudi sales take place from the Strait of Hormuz, there is the possibility of moving products from the Red Sea end, through the Yanbu al Bahr. In the case of Oman (2.8%), supplies through Salalah could be a possibility. All of this, however, means higher costs and a lot depends on capacity to move supplies, in the case of Saudi Arabia, from the east coast to the west coast. Increasing supplies from Nigeria (9.2%), Venezuela (4.5%), Australia (4.3%), among others are also possibilities.

So in the event of a serious crisis, supply disruption may be manageable. The more likely impact, however, is going to be a increase in prices. Prices of the Indian basket rose by $7 to $112 in just the last week—numbers of 30-40% are doing the rounds as a possible jump in crude prices. For the PSU oil firms who are losing R388 crore per day (that’s R1,41,620 crore on an annualised basis)—R11.3 per litre diesel, R28.5 per litre kerosene and R326 per LPG cylinder—a further hike in global crude prices will be a disaster. More so since, last week, while oil PSUs had planned to raise prices by around R2 per litre of petrol to make good the losses on this, the government prevailed upon them to postpone the hike. The way the government looks at it, however, the UP elections come first.



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