Abstract: The recent decisions by the Indian government to drastically reduce India’s existing energy trade with Iran may give birth to unforeseen repercussions for the future.
Possible repercussions of India’s souring relations with Iran
The recent decision by the Indian government to substantially reduce the existing energy trade with Iran may have had many possible reasons. Indeed many noted International affairs experts like Vijay Prashad believes this was India’s acquiescence towards overall US position in Iran. [1]
“The US has sought an alliance with India for the past decade with the aim of putting pressure on China, of balancing out its reliance upon Pakistan's geographic location, and of isolating Iran in the forums of the non-aligned world.”
And again he mentions the following in the same article [1].
“By many indications, India has accepted the broad policy orientation of the US on Iran, and to a lesser extent on Afghanistan. On China there is less harmony.”
Irrespective of the motives behind this position taken by the Indian government, it is important to understand what could be the possible repercussions behind this decision.
1. The overwhelming majority of global oil trade and subsequent pricing of this is done through two markets a. New York Mercantile exchange (NYMEX) where oil is valued with reference to West Texas intermediate crude standards and b. London’s IPE where oil prices are referenced in respect to the Brent crudes produced in the North Sea.
2. In both these two markets, the trade is done through futures trading whereby the buyer agrees to take delivery and the seller agrees to provide a fixed amount of oil at a pre-arranged price at a specified location.[2] Since futures trading systems are complex mechanisms this may enable volatility regarding oil prices.
3. Now in both these two markets all the transactions are made in US dollars. Iran came up with the idea of its own Iranian oil trading market which started operating in this year march in Kish Island of Iran. The Iranian idea is to allow trading of oil in terms of a range of national currencies like Euro , Yen , Yuan and Rupee and the transactions would be done not in the future trading system but in the “on-the-spot” type of system whereby direct trading and fixing of prices between the buyer and seller can be done without the involvement of any possible third parties thereby reducing speculation ad volatility in the prices.[3]
Indeed there are many prominent experts who believe that the real bone of contention between Tehran and Washington has little to do with Iran’s nuclear program but Tehran’s decision to open its own oil trading system.
4. Since we in India are now starting to look to other options instead of Iran when it comes to energy imports , it means that we would be doing more in terms of dollar-based transactions with regards to our oil purchases and thus we would be more open towards subsequent volatility in International oil markets.
5. Considering our already substantial trade deficits and also considering that a large share of this comes with India’s burgeoning oil import bill, more exposure to International market price fluctuations of oil may not be necessarily good for our hopes of cutting our trade deficits in near and long term futures.
Had our leaders shown the foresightedness by continuing through our existing Iranian oil imports, we would have been able to take advantage of the situation and strike deals which may well have been beneficial for us like for example if we in exchange of Iranian oil could have been able to sell our substantial amount of surplus Wheat as well as help Iran in building infrastructure as well as other important aspects like aircraft spare parts. All these would have been beneficial to us without much inflating our already precarious trade imbalances.
6. Another technical aspect of reducing oil imports from Iran has to do with the capacity of our refineries to handle non-Iranian crude. Iranian crude oil is considered to be a variety of light crude which can flow easily through the terminals of the refineries. Now our need to switch to non-Iranian crude could mean that we may need to remodel our existing refineries and this ensures that our overall input costs could further swell.
7. The exposure to International market prices has already caused a price hike in India in the last month with further possibilities in short-term future. [4] [5] Irrespective of political ruckus behind this, one possible impact of any further hike in domestic petroleum prices would be to further tighten the purse strings of Indian consumers which could ensure overall reduced consumer demand. This is something the country can ill afford at this critical juncture of our economy when it is already suffering from lower rates of productivity.
8. There are some talks regarding possible future issues involving insurance for Indian companies after the July 1 when European sanctions on insurance companies comes to effect with respect to the tankers containing oil from Iran. [6] This is where the benefit of the long-proposed overland energy pipeline from Iran to India via Pakistan comes into play.
This pipeline if constructed would have reduced our dependence on overseas insurance cover for these kinds of emergency situations. The construction of a pipeline such as this one would also have provided much needed commercial boost for our acrimonious relations with Pakistan. Iran and Pakistan are willing to go ahead with their part on this pipeline and it is up to us to make our mind on this vital issue.
9. Increasing economic interactions with the countries of Central Asia has been one of the key features of Indian foreign policy establishment of late. The Iranian port of Chah Bahar is one of the ports through which we are able to pursue our trade with some of the Central Asian countries. Our decision to reduce oil imports from Iran may jeopardize those crucial trade links with Central Asia.
10. Our past contacts with Iran had helped us considerably with regards to Afghanistan. Indeed during the Taliban reign of Afghanistan; Tehran was one of the very few foreign capitals with which we could have made contacts in terms of our existing ties with the then anti-Taliban northern alliance. We have already made substantial economic and infrastructure investments in Afghanistan in the past decade or so and in a post-US Afghanistan, the future of those investments of ours may very well be in uncertain terms considering now we have burnt sufficient amounts of bridges with Tehran. A realignment of Tehran and Islamabad on their common opposition to any continued presence of Western forces in that country is certainly not what our policymakers did expect in the first place.
11. It is without doubt that our policymakers had made the decision to reduce our imports of Iranian oil with certain long-term interests in mind. But this decision also gives us an image that when it comes to holding on to our commitments even under duress and compulsion, India could be fragile and malleable. This and all the other economic repercussions that have been discussed here are substantial when our leaders and policymakers make their next move with regards to Iran.
REFERENCES
[3] “Iran Opens oil bourse – Harbinger of Trouble for New York and London” by John Daly published on OilPrice.com on July 18, 2011.
[4] “Petrol bomb: Fuel price hike angers political parties” published on HIndustanTimes on May 23, 2012.
[5] “Indian shares rise on hopes for fiscal measures” published on Business Standard on June 20, 2012.
[6] “Insurance to stop Indian shippers handling Iran oil in July: sources” published on livemint.com on June 11, 2012.
