UNCERTAIN TIMES: ON INDIA’S OIL IMPORTS
26, Apr 2019
Prelims level : Economics Growth Mains level : Indian Economy and Issues
Why in News:
- The oil market have undergone with a great deal of uncertainty over supplies which is due to the US economic sanctions against Iran.
- The United States announced that it would not extend beyond May 1 the 180-day waiver which was granted to eight countries, including India, to purchase oil from Iran.
- It causes the price of Brent crude oil to witness a sudden jump to more than $75, from $71.97, which adversely affects the supply of oil in the market.
- The price of Brent crude, has been rising steadily in the last few months, and has increased by almost 50%. It was low of about $50 in December, as a result of the decision of the Organisation of the Petroleum Exporting Countries (OPEC) to restrict their output to boost prices.
- India imports more than 10% of its crude oil from Iran, so the government faces the immediate challenge of having to find alternative suppliers to meet its huge energy needs.
Effects in India
- Higher oil prices will have a negative impact on India’s current account deficit, fiscal deficit and inflation in the wider economy.
- The current account deficit, which had narrowed to 2.5% of GDP in the December, will worsen. The fiscal deficit, which has been widening in advance of the elections, is also likely to get increasing out of control. While inflation is relatively considerate at the moment, any further acceleration in price gains will impact our economy.
- Jump in the oil price results a secular rise in the price of the commodity.
- Increase in the price of oil will result in increase in income and demand of shale gas suppliers of US.
- Higher oil prices also make a great deal of profit for members of OPEC countries where the cheat can be done to restrict supply, which affects Indian economy.
Background: / US sanctions against Iran:
- It is officially called the Joint Comprehensive Plan of Action (JCPOA).
- It was signed between Iran and the P5, plus Germany and the EU in 2015.
- P5 is the 5 permanent members of the UNSC (US, China, France, Russia, and UK). The deal aimed at curbing Iran’s nuclear programme.
Under the deal:
- most of Iran’s enriched uranium was shipped out of the country a heavy water facility was rendered inoperable
- operational nuclear facilities were brought under international inspection In return, the deal involved lifting of international sanctions on Iran.
- Iran has been compliant with the provisions of the deal. The deal is largely a successful one.
- So the actual concern for US is Iran’s re-accommodation in the global economic mainstream. This is as well the concern for US’s closest allies in West Asia, Israel and Saudi Arabia. Iran’s rising economic profile would embolden it to increase its regional presence. This would pose a strategic threat to the interests of the U.S.-Saudi-Israel axis.
- Shale gas and oil are unconventional natural resources. They are found at 2,500-5,000 metres below the earth’s surface. They are deeper in comparison to conventional crude oil found at 1,500 metres. The process of extracting shale oil and gas requires deep vertical drilling followed by horizontal drilling. The most common way to extract shale gas is ‘hydraulic fracturing’ (fracking), this is nothing but sending high volumes of water mixed with certain chemicals to break the rocks and release the trapped energy minerals.
- Shale are fine-grained sedimentary rocks that can be rich sources of petroleum and natural gas. Shale gas refers to natural gas that is trapped within these shale formations.
- The shale oil is used as fuel oil or upgraded to meet refinery feedstock specifications by adding hydrogen and removing sulphur and nitrogen impurities.
- Shale oil and conventional crude oil have different kinds of impurities.
- The catalytic processes adopted by the refineries should be able to handle these impurities.
- Natural gas is a cleaner-burning than coal or oil.
- The combustion of natural gas emits significantly lower levels of key pollutants.
- The government will need to take steps to diversify its oil supplier base and also work towards increasing domestic sources of energy supplies.
- Opening up the renewable energy sector for more investments will also help avoid over- dependence on oil from the global market to meet the country’s ever-increasing energy needs.