Possible Impact of Attack on Saudi Arabia's Oil Installations on Indian Economy - Nirmal Ganguly

This weekend's drastic drone attack on oil facilities in Saudi Arabia immediately sparked hike in global oil prices casting a scene of gloom and doom world-wide. How significant and severe will be the impact of attack of this strike on Saudi oil facilities, only time will tell. If this disruption is temporary, say lasting for a a fortnight or so, then the world as well as India can come out of it largely unscathed. But if it prolongs further, then its repercussion world over and on India can be drastic and radical. What is more, the potential geo-political tension and conflict that this may result, seems deadly even to think of. It is indeed gratifying to note that both US and Saudi Arabia have understood to have assured India that oil supplies to India will continue unabated.

It is noted that last Saturday's attack on Saudi Arabia's oil installations affected production of about 5.7 million barrels of crude daily. This seems to be over half of the crude supplies from Saudi Arabia and greater than 5% of the world's daily production of crude. Most of this lost output goes to Asia. This disruption happens to be the biggest on world market, even a little larger disruption than the time of Iran's 1979 Islamic Revolution at 5.6 million barrel daily.

Benchmark Brent crude price spiked by nearly 20% in the first moments of trading on Monday, September 16, 2019 before coming down to 10% higher as trading continued, bringing the price to about $66 a barrel. The crucial question is how soon Saudi Arabia can undertake the necessary repairs and restore the normalcy in its oil supplies. It is also not clear as to who has masterminded the attack. It is generally thought that the claim of Houthi rebels in Yemen of having staged this drone attack, is hard to believe. US has already indicated its clear disinclination to believe that such an attack can be done by Houthi rebels in Yemen situated about 1600 kms away. The intriguing matter is that Saudi Arabia has maintained a stoic silence in this regard so far. It seems that the world has to wait and see for another few days to better understand the situation. But the explosiveness of the situation is indeed frightening, having the potential of threatening the very global stability which is already challenged in a big way by US trade war, fear of another global financial crisis, impending Brexit and burgeoning global debt situation.

Possible Impact of this attack on Indian Economy

India is the third largest crude oil consumer in the world. So India's vulnerability to oil shock is too evident. What is more, India's crude requirement is met by import to the extent of about 84%. This is really a staggering amount. So quite naturally, the adverse impact of such a drop in crude supply on India on a longer basis due to shrinking of crude production by Saudi Arabia to the extent of more than 50%, can be enormous and gigantic. And if this syndrome continues longer than a fortnight, the situation can be indeed frightening. If the price of crude goes beyond $80 a barrel, it would definitely have a big deleterious effect on the Indian economy. The moot question is that if this crisis continues beyond a month what would be the effect on the prices at which India can expect to get its required crude. So the drop in oil availability and its heightened price, are both the matters of big worry for India. And to have arrangement with any other oil supplier, it takes time and cannot be arranged overnight. 

The following are some of the possible adverse effects on the Indian economy if this oil shock continues for more than a fortnight or so.

1) It may significantly raise India's current account deficit.

2) It may drastically enhance India's fiscal deficit.

3) It is expected to have a dent on India's relative price stability in a big way enhancing the rate of inflation transmitting the inflationary pressure in a marked manner through cascading effect raising the transportation costs in a significant fashion.

4) It may worsen the condition of already tottering auto and auto ancillary industries. What is more, the demand for four wheel vehicle may also go down further due to higher cost of petroleum.

5) India is already encountering a significant economic slowdown and the situation may get further worsened.

6) Overall industrial and agricultural output may get adversely affected due to rise in input costs.

On the positive side, from the environmental improvement and sustainable development point of view, it may encourage greater use of ethanol and other bio fuels and other alternative energy sources. It may also inspire the Indian customers to go in for electric vehicles in a greater measure.

Concluding Observation

If this problem continues, the main fear emanates from the geo-political horizon. If this leads to large scale conflict between US and Iran, then it will be a terrible issue and that may destabilize the global economy and security in a big way. So there is a need for abundant restraint on the part of all concerned so that the situation does not escalate further. There is also need for greater discussion and understanding among all major players so that the situation is not allowed to flare up. At the same time, one expects that sooner than later Saudi Arabia is able to repair its installations and restore its normal oil production. But the main challenge is that for now the situation is not at all clear. One does not know so far as to what is Saudi Arabia's reaction and stance. But it is true that India is so much vulnerable. China has managed to develop its oil reserves both inside and in other countries through joint ventures while India is much more vulnerable. There is no other option other than to wait and watch in the coming few days to better understand the situation. But it is true that US, middle-east countries, especially Iran and Saudi Arabia will have to be very cautious, responsible and calibrated in their approach so that the world peace and global economy are not compromised and jeopardized and better wisdom prevails on all concerned.