For Every $10 Hike in Crude, Import Bill Will Go Up by $14 Billion

Chennai: Tensions around the Strait of Hormuz, as well as conflicts in the Middle East region, are expected to significantly affect India’s crude and natural gas supply, trade and inflation. Prashant Vasisht, ICRA Senior Vice President and Co-Group Head of Corporate Ratings, found that on an average, the annual impact of every $10 increase in crude oil price on India’s crude oil import bill is around $13 to $14 billion.

Question) What is the current situation in Hormuz and how important is this strait for our crude and natural gas supply and trade?

Approximately 20 to 21 million barrels of oil pass through the Strait of Hormuz, accounting for approximately 20% of global liquid oil consumption. This is now an area where there is a lot of active kinetic action. Therefore, we see that the Strait of Hormuz and the Red Sea route are also closed. Currently about 50% of our crude oil imports from India and 54% or 55% of our LNG pass through the Strait of Hormuz. And if this situation lasts for a long time, that is, if no ship can safely pass through this strait, then these materials may be affected.

Question) Do we have alternative routes to avoid the Strait of Hormuz? They will probably increase freight costs and shipping time as well. How feasible are these ways?

So there are not many alternative ways. There are several pipelines, but they can only accommodate a portion of the crude oil passing through the strait. Since many of these countries are located across the strait, there are no alternative routes to route this crude oil or LNG. So in this sense, there may be a supply situation where supply is restricted.

There are also alternative sources, these should be other geographies such as the USA, South America and Africa. However, if this oil route is interrupted for a long time, crude oil prices will rise, in which case even if you buy alternative materials, these will be at higher prices and higher freight costs, leading to a higher import bill.

Question) After Russia’s sanctions, we are increasing our purchases from the Middle East, Venezuela and the USA. We are also reducing our crude oil imports from Russia. So how will this increase our crude oil import bill?

It will definitely be like crude oil from the Middle East, just in a pure sense, just in terms of freight costs, because the Middle East is close. While the price of crude oil coming from the Middle East is around 40 to 70 cents a barrel, the price of crude oil coming from the USA can go up to 2.5 to 4 dollars a barrel. As you know, freight prices are also very variable. Other things being equal, this is simply the trade cost difference. However, here we are talking about a large part of the global supply being disrupted. And if this continues for a long time, it could lead to higher crude oil prices; This means not only higher trading costs, but also higher crude oil prices, even if the crude oil is sourced from elsewhere.

Question) In your opinion, how much increase in crude oil prices is expected in the near and medium term and how will this affect our inflation?

It’s very difficult to gauge how much of an impact there might be since the buildup started or the tension started about a week, about two weeks ago. We have already seen crude oil prices rise from $65 per barrel to $72.73. And depending on how the situation will develop and how long it will last. And this extremely important energy blockage point is broken. This will determine the future course of crude oil prices.

Question) If we take into account the previous tensions in the Middle East region, how much can crude oil prices rise in the near and medium term?

If you look at the 2008 example where a crude oil tanker and a military ship came face to face, we saw crude oil prices rise to around $140 per barrel. Fortunately, we see that there has been an increase in crude oil prices of approximately 7-8 dollars this time since this situation started. For the last day and a half, crude oil prices have remained in the range of $72 to $73 per barrel. So how the situation develops in general will have a significant impact on crude oil prices.

It will be difficult to make predictions this way. We’ll have to see how things develop here.

Question) What is the status of trade in non-oil goods with the Middle East? We also have a very good trade with this region. Which goods are likely to be affected?

Therefore, in addition to crude oil, I believe we have a very active trade relationship with the Middle East. A huge diaspora lives there. So there are a lot of consumer goods that are transported along with goods like jewellery, jewelery and textiles. So, given that these two important routes are now closed, or at least temporarily closed for now, it seems they could all be affected as well.

Q) Apart from trade, we have a huge diaspora in the region. so jobs are likely to be threatened. What about remittances?

In the first phase, money transfers are likely to increase when people send money to their home country, i.e. India. Later, there may be a decline depending on how heated this war will become and how long it will continue. So that’s probably what we’ve seen in the past.

Q) Overall, what could be the bigger impact on the economy if this crisis lasts for a long time and crude oil supply is disrupted?

The first impact of higher crude oil price will be on the import bill. The annual impact of every $10 average increase in crude oil price on India’s crude oil import bill ranges from approximately $13 to $14 billion. Oil marketing companies could then see their margins squeezed due to low marketing margins. This may affect inflation in crude oil prices. If gasoline or diesel prices increase at the pump level, this could also have an inflationary impact on the economy, given that these fuels are widely used to transport goods. So these might be some of the impacts that higher crude oil prices will cause.

Q) We are reducing our imports from Russia following sanctions and our interim framework for the US trade agreement. Do you think that when the supply of oil from the Middle East becomes very difficult and there are interruptions, we will have to switch back to our Russian crude oil?

Sanctions were imposed by the USA on two major crude oil suppliers from Russia. So Indian companies comply with the sanctions. that is, India can procure non-sanctioned crude oil from these suppliers.