Middle East and India: A Stormy Relationship

Photo: Twitter/@narendramodi

As tensions continue to escalate in the Middle East following the drone strikes on the Saudi oil industry by Houthi rebels, the stakes for India are very high.

Middle East – Mainstay of India’s energy needs

The Middle East is the most important region in the world where India meets its energy needs, India imports nearly 85% of its oil needs and 34% of its natural gas needs, according to the Union Finance Ministry India has already shelved out close to $122 billion for its oil import bill. The region hosts three of India’s most important oil exporting partners – Saudi Arabia, UAE and relatively restive Iran. Till recently, India was the second largest oil importer from Iran after China.

Geopolitically, the Middle East occupies an important position in international relations due to its geographical location and proximity to continents and countries – South Asia, China, Central Asia, Europe, and Africa. The region is strategically significant due to its enormous energy resources, trade route links to different parts of the world and the fact that it is a place of origin for the Abrahamic religions. It is the world’s largest oil-producing region accounting for 34% of world production, 45% of crude oil exports and 48% of proven oil reserves. All powers seek a stake in the affairs of the region due to the abundance of natural resources. It is also a region plagued with instability largely due to the involvement of external forces, and sometimes due to internal conflicts. Continuous flow of oil and gas is important for the India’s energy security. India was the third-largest consumer of oil and fourth-largest LNG (Liquefied Natural Gas) importer in 2017. To meet its requirements, India has been heavily dependent on the Middle East. Saudi Arabia, Iraq, Kuwait are the top countries that fulfill the major demands of India’s energy. 

Grappling with the resultant aftermath

Global tensions tends to have a retrospective effect for India as far as the oil and natural gas prices for India is concerned, any increase in brent crude price to the tune of $10 results in increase of oil import bill to the tune of $15 billion. Kabir Taneja, Associate Fellow Observer Research Foundation, said: “Saturday’s attacks have reportedly affected 5 million barrels per day of oil production from Abqaiq. These attacks could push up oil prices significantly, causing stress to an already volatile economy in India.”

While supply would resume — such disruptions have been observed before in case of both the Gulf wars — oil price fluctuation is the main concern here, he added. “If such attacks become frequent, and ways to mitigate (such) crude drone strikes shuttering multi-billion dollar facilities are not brought in urgently in Saudi Arabia, energy consumers in import-heavy countries like India could face the brunt,” Taneja cautioned.

This development is bound to affect several emerging economies, including India’s. The Union Petroleum Ministry has sought to allay fears of a supply cut by relaying messages of assurance from Aramco officials, but there is already an indication that crude prices would rise further due to an increase in the risk premium, leading to increased fuel pump costs. With India importing more than two-thirds of its oil from Middle East, a price surge is expected to impact the current account, and will result in further currency depreciation as was the case on Monday. Higher fuel costs and the imported inflation could also hurt the consumer at a time of a slowdown in the economy. The government should be prepared to handle the fallout with steps such as re-evaluating the excise duties on petroleum products.

Despite pious statements from successive governments about building strategic petroleum reserves, doubling down on domestic exploration and diversifying the import basket, India has taken ineffectual baby steps towards energy security in the past decade. After much debate, it managed to create capacities for 5.3 million tonnes of strategic petroleum reserves amounting to about 10 days’ consumption in 2018, with plans to add another 6.4 million tonnes. But this remains woefully inadequate against the global norm of 60-90 days’ reserves. Despite much lip service on attracting foreign investments, domestic oil and gas exploration remains a non-starter, with local crude output on a downward curve in recent years. Multiple policy reboots — from NELP (New Exploration and Licensing Policy) to HELP (Hydrocarbon Exploration and Licensing Policy) to Open Acreage Licensing — with changing rulebooks have muddied waters for prospective investors. Efforts to diversify India’s oil import basket have also witnessed setbacks lately, with the government giving in to US political pressure to reduce imports from traditional energy suppliers such as Iran and Venezuela.

Overall, the Saudi Aramco incident is a wake-up call to Indian policymakers to work on a cohesive national policy on energy security, instead of responding with fire-fighting measures every time there’s a global oil flare-up.

What should be India’s strategy to secure energy needs?

India has stepped up diplomatic efforts to limit the damage from disruptions in oil supply as a result of drone attacks on oil facilities in Saudi Arabia. The junior minister in the Ministry of External Affairs, V. Muraleedharan, who was in Kuwait on Saturday, has spoken to several supplier countries to ensure additional supplies while Foreign Secretary Vijay Gokhale has kept the window open for possible ramp-up of imports from Iran. India has substantially reduced oil purchases from Iran due to US pressure. India is the third-largest consumer of oil in the world. Saudi Arabia is its second-largest supplier.

The foreign secretary is in Tehran for the 16th round of Foreign Office Consultations to review the ongoing infrastructure and connectivity projects there. He met Iran’s Foreign Minister Javad Zarif along with other top officials and discussed the situation arising after the attacks. However, Tehran is in the midst of a complex situation. It is under U.S. sanctions over its nuclear programme. Washington has forced most countries to bring their oil imports from Iran to zero. New Delhi is insisting on getting alternative supplies from Iran and is exchanging notes with Washington on the developments; it is seeking some relaxation of the sanctions to accommodate the current realities.

India has other concerns too. Many see Tehran’s direct or indirect hand in the attacks. China may use the situation to increase its leverage with Tehran. China and Turkey had refused to budge to the US pressure to bring oil imports from Iran to nil. New Delhi is busy checking all the boxes to deal with one of the biggest oil-related geopolitical tensions in the last two decades.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of The Geopolitics.