[Editorial Analysis] A tough balancing act between geopolitical realities and energy security

Mains Paper 3: Economy

Prelims level: Organization of the Petroleum Exporting Countries

Mains level: Energy, Infrastructure etc.

Context

• The US oil and banking sanctions against Iran will come into effect on 4 November.

• The oil market is unusually calm. Crude prices have fallen during October.

• The Organization of the Petroleum Exporting Countries (Opec) crude price basket went down by 8.6 %, while the Brent benchmark fell by 9.4 % during the month.

• The short-term fluctuations, a different picture emerges if we take the long-term view. Over a one-year horizon.

• The Opec benchmark has gone up by 50%, while Brent crude went up by 30%.

Reasons behind this price increase

• Opec has said that the market is well supplied.

• For most of the consuming countries, it is not simply a question of finding replacement oil. Crude import has to be at prices they can afford.

• The price has already gone up.

• The Indian crude oil basket is up by nearly 30% since last year, which would add more than ₹2 trillion to our annual oil import bill if the trend persists.

• If rupee depreciation is factored in, the effect will be even more pronounced.

• Prime Minister Modi has said that high oil prices are hurting global economic growth and oil producing countries should do more to bring down prices.

Importance of Chabahar Port

• India is committed to develop Chabahar Port.

• The port will expand Afghanistan’s options and reduce its dependence on transit trade through Pakistan. The project has been welcomed by all the Central Asian countries.

• The expansion of Chabahar Port is in no way linked to Iran’s oil exports, which go through the Kharg terminal in the Gulf.

• The port does not add much to Iran’s revenue; it currently handles less than 1.5% of Iran’s total maritime trade. It is a civilian facility open to all countries.

Way forward

• Iran’s compliance with the nuclear accord has been confirmed by the International Atomic Energy Agency (IAEA). As “provisional measures”.

• The International Court of Justice (ICJ) has ruled against the US sanctions. Nevertheless, the US sanctions remain a potent force.

• The increase in oil prices is not only due to impact of sanctions against Iran, but is also driven by policies pursued by Opec and non-Opec producers to restrict crude oil production to keep the prices high.

• The only option that remains for India is reviving rupee payment arrangement to bring down current account deficit, and ensure continuity in Indian exports, which are largely limited to food and pharmaceuticals.

• India has an extremely important and growing relationship with the US. It also has geo-political compulsions, and an age-old relationship with Iran as well as its Arab neighbours.

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