India to wait and watch as US exits Iran nuclear deal
The US pulling out of a historic 2015 accord with Iran comes in backdrop of a rally in oil prices
New Delhi: The Indian government is in a ‘wait and watch’ mode as President Donald Trump pulled the US out of a historic 2015 accord with energy-rich Iran, which was inked to curb the Islamic Republic’s nuclear programme in return for ending sanctions.
The development assumes significance for India, which is the world’s third largest oil importer and had been ramping up supplies from Iran—its third largest supplier after Iraq and Saudi Arabia.
“The Iran Deal is defective at its core. If we do nothing, we know what will happen. In just a short time, the world’s leading state sponsor of terror will be on the cusp of acquiring the world’s most dangerous weapons,” Trump tweeted on 8 May.
The US withdrawal from the Iran deal follows its reneging from the Paris climate agreement. However, of the other five world powers—Britain, China, France, Germany and Russia— that are parties to the historic pact with Iran, the European partners have criticized the move.
“We need to wait and see what kinds of sanctions have been imposed this time. Last time the sanctions were imposed on oil and not on gas. We will also need to understand how these sanctions impact the banking channels. We have dealt with this earlier,” said an Indian government official requesting anonymity.
“The European partners are not with the US on this. One needs to wait and watch, as it will be interesting. We have been trying to diversify our supply portfolio, which is a good thing,” said a person closely associated with recalibrating India’s energy security strategy during the previous sanctions against Iran.
The earlier sanctions imposed by the US and the European Union (EU) on Iran, combined with the ones by the United Nations (UN) Security Council over its nuclear programme, included strictures against Iran’s energy and banking sectors, which could also hurt firms from other countries doing business with Tehran.
The US sanctions, which take effect after six months, come in the backdrop of a rally in oil prices as a result of the Organization of the Petroleum Exporting Countries (Opec) and Russia cutting supplies. Falling production in Venezuela and geopolitical tensions, such as escalating conflict in Syria, have also contributed to the price spike.
“As we exit the Iran deal, we will be working with our allies to find a real, comprehensive, and lasting solution to the Iranian threat. We have a shared interest with our allies in Europe and around the world to prevent Iran from ever developing a nuclear weapon,” Mike Pompeo, US Secretary of State, said on 8 May.
“As we build this global effort, sanctions will go into full effect and will remind the Iranian regime of the diplomatic and economic isolation that results from its reckless and malign activity,” Pompeo’s statement added.
The cost of the Indian basket of crude, which averaged $47.56 and $56.43 per barrel in FY17 and FY18, respectively, rose to an average of $69.30 in April 2018, according to data from the Petroleum Planning and Analysis Cell (PPAC). The price was $73 a barrel on 8 May. The Indian basket represents the average of Oman, Dubai and Brent crude.
“In the world looking to decarbonize, with more and more hydrocarbon discoveries coming to fore, the producers are looking for long-term monetization options. The sanctions would further make India, as would the other importers, face difficulty in continuing Iran as source. Analysts are painting a possibility of differentiated currency purchases as a solution,” said Deepak Mahurkar, director (oil and gas industry practice) at PwC India.
India has got reason to worry given that its energy needs are being primarily met through imports. Diesel prices on 24 April were Rs65.93 per litre in Delhi, a record high. Petrol prices also rose to Rs74.63 per litre on 24 April, the highest since they touched Rs76.06 per litre on 14 September 2013. Retail prices have remained unchanged since 24 April, with the chairman of the state-run Indian Oil Corporation Ltd, Sanjiv Singh, on 8 May stating that his firm has decided to “temporarily moderate” prices.
Oil imports rose by more than 25% in FY18 to $109 billion from a year ago. Elevated oil prices could adversely impact India’s trade deficit and, consequently, the current account deficit (CAD), which stood at 1.9% of GDP in the April-December period of FY18.
India’s inflation and CAD could widen significantly if high crude oil prices persist, the United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP) said in a report released on 8 May.
India is trying to develop the port of Chabahar on Iran’s east coast as a way to gain access to the markets of Central Asia and Afghanistan by bypassing Pakistan. The port is about 72km from the Pakistani port of Gwadar, which China is developing.