The fire of Iran-Israel war burning in the Middle East is now going to reach directly into the pockets of the common Indian. This tension spreading in Gulf countries is likely to have an impact on India’s economy and household budget. Nine days have passed since this conflict and there has been an earthquake in the crude oil market. US President Donald Trump also believes that this war may drag on for a long time. If this happens then a huge increase in the prices of crude oil is possible.
The price of crude oil, which was around $62 per barrel before the war started, has crossed $90 within just a week. The price of American crude oil i.e. WTI has reached $90.90 with a huge jump of 36 percent. At the same time, Brent crude is also trading at $ 92.69 per barrel with a rise of 27 percent. This increase is directly indicating inflation in the times to come.
‘War premium’ is increasing rapidly
The Strait of Hormuz is a very important route in the crude oil supply chain. About 20 to 25 percent of global oil passes through here. Since Iran shares its border with this region, it has imposed many restrictions here amid tension. This may cause loss to India, because most of our imported oil comes through this route. In view of the danger on this route, the cost of insurance and freight transportation of ships has suddenly increased. According to Balasundaram R, Marine Insurance Head, Policybazaar for Business, in view of the increasing risk of war, the existing ‘war risk premium’ for shipping and cargo companies is now proving inadequate. Now they have to pay huge amounts for insurance, which will have a direct impact on the final price of oil.
India’s heavy dependence on the Middle East
This situation is more challenging for India because we buy about 30 to 50 percent of our crude oil requirement directly from the Middle East. The country’s refineries have also been designed mainly to process crude oil from this region. However, India has a Strategic Petroleum Reserve of 25 to 30 days to deal with the crisis situation. But it is important to keep in mind that this is only for emergency, not for a long lasting war.
Will there be a brake on the growth rate?
The recent increase of 10 to 15 dollars per barrel in crude oil can spoil the economic figures of the country in the coming times. Every $10 rise in crude oil prices in the international market can reduce India’s GDP growth by about 0.5 percent. John Kilduff, partner of Again Capital, estimates that oil may soon touch $ 100 per barrel.
At the same time, Qatar’s Energy Minister has given a dire warning in an interview. He believes that all the energy producing countries of the Gulf can stop their exports within a few weeks. If this fear proves true, the price of crude oil will reach the historical level of $ 150 per barrel. This situation will take inflation to its peak in India and our fast growing economy may derail.