DM Deshpande
The war in Iran started on February 28. Within a day viz. on March 1, Iran’s Revolutionary Guard (IRGC) declared the Strait of Hormuz closed. It also threatened to attack vessels that attempted to go through the narrow passage.
A mix of threats-including missiles, drones, fast attack boats and mines-have ensured that shippers do not venture into the Strait. As of March 20, the BBC has reported 20 verified attacks on vessels off the Iranian coast. As a result, for more than a month now, the critical maritime route of the Strait of Hormuz has remained shut by and large. There is no physical blockade but Iranians have managed to close the narrow chokepoint nevertheless. The US and allies have a military presence but the geographical advantage lies with Iran.
The corridor accounts for carrying 20 per cent of all the global oil and LNG. Last year 20 million barrels of oil and oil products per day passed through the Strait of Hormuz. That is a staggering $600 billion worth energy trade per year according to the US Energy Information Administration (EIA).
A few ships of friendly nations of Iran such as China and India have managed to get through some tankers and ships with their destination flags and after coordinating with the Iranian authorities. According to a second rapid assessment by UNCTAD, the number of ships going through the transit has dropped from 130 per day in February this year to just six in March, indicating a collapse of 95 per cent.
Trump has announced a two week ceasefire which by all accounts is fragile. There is no indication that the crisis in the Strait will be resolved any time soon though it is one of the US conditions in the declaration of hostilities for a fortnight.
Crude oil is an internationally traded volatile commodity. It is highly sensitive to supply-distribution disruptions and demand side fluctuations. OPEC is a powerful cartel that tries to influence prices by regulating supply.
Yet, most of the time its actual impact on oil prices is marginal and temporary. Oil prices are determined by global markets. That is why, though the US is a net exporter of petroleum, it cannot influence the global oil prices. Even in the US petrol prices have gone up.
The US was one of the major importers of crude oil from the Gulf. But with the shale production going up, its dependence on Middle East oil has come down to 0.5 million barrels per day which comes to about 7 per cent of the total crude imports.
The problem is that the US does not have modern refineries to convert the shale oil which is sweet and light. Most of its refineries are old which were built to refine heavier, sour oil. Hence it exports shale oil and imports refined oil. As the global prices of oil have risen sharply, to over $100 per barrel, due to the war, the US is also impacted.
The Strait of Hormuz carries oil and gas produced in Iran, Saudi Arabia, Qatar and UAE. The closure of the Strait has hit all these nations. By restricting the transit through its corridor, Iran has succeeded in sending oil and gas prices soaring. Since sanctions on its oil are removed, albeit temporarily, it is helping Iran in a big way to fund its war expenses.
China had a virtual monopoly on oil imported from Iran accounting for 90 per cent of the total. Now other nations such as India are also importing Iran’s oil. At elevated oil prices, all those products that China makes by using oil, their prices too will have to inch up in tandem. That is the ripple effect that makes a whole lot of goods and services expensive for consumers all over the world.
Economists therefore warn of higher levels of inflation if the oil prices remain elevated at $100 per barrel or rise further due to war escalation by concerned parties. Adding to the problem is the question of importing fertilisers from the Gulf. India, for instance, is preparing for the coming monsoon season. And the dependence on Middle East fertilizers is high. Scarcity and supply side bottlenecks are certain to result in higher end user prices. If the war continues, there seems to be no escape from higher food grain prices.
There are also reports of attacks on oil and gas fields and electricity plants. These are additional energy shocks even as the oil disruption is causing unprecedented losses and sudden spike in prices. Heavy damage inflicted so far means weeks of resurrection even if the war stops. There is no inkling of cessation of hostilities.
On the contrary, there are reports of escalations on all sides. Emerging market economies such as India are severely impacted. Petrol prices at the pump have not risen but they cannot remain unaffected when the other oil importing nations have had to raise prices by 50 per cent in less than a month.
In any case inflationary expectations are building up. At around $700 billion, India’s foreign exchange resources are comfortable. But with energy prices shooting beyond $100 per barrel, there will be pressure. Add to this the projected fall in remittances from abroad generally and from the Gulf in particular. Exporters are already struggling with high tariffs and trade bottlenecks.
The Middle East is a major importer of food grains and other products. If it takes a hit, as is certain to do, it will impact both the Gulf nations as well as India. The Indian rupee, as a result, is falling steeply vis-a-vis the dollar. This will mean a costlier oil import bill. As geopolitical tensions rise, there is an increased outflow of foreign funds to safer havens. Hence, the steep fall in stock market prices are a reminder of the pandemic times.
After hectic parleys at the diplomatic and political level, a temporary ceasefire has been declared by both the US and Iran. However peace is still elusive, threatening the world’s energy security.
The author has four decades of experience in higher education teaching and research. He is the former first vice-chancellor of ISBM University, Chhattisgarh
