Eventually, India should feel the pinch of oil price hike and inflation. Arab nations are the major suppliers of crude oil to India. Oil is the second biggest energy source for India, after coal. It accounts for nearly one-third of total energy in the country. Larger share of oil energy is used for transportation. Given these, the oil crisis could emerge as an important burden on inflation in the country. (Image: KPBS)
Unlike the US-China trade conflict and Russia-Ukraine war, India does not fall prey to the direct impact of the Hamas-Israel war. It is the spillover impact, which causes concern if the war spreads and notably if the Arab world joins the war.
Israel and Palestine, both are not major economic partners of India, though politically, India’s foreign policy has a sheen to balance between the two. Israel accounts for less than two percent of India’s total trade. India does not trade with Palestine directly. It goes through Israel.
The World Bank in its Commodity Outlook Markets said that the effects on oil prices will be limited, if the conflict does not expand. The Outlook cautioned the war “would darken if the conflict were to escalate”. In other words , if the Arab world joins the war, oil prices will surge and the effect will be on commodity prices, especially food prices, World Bank says.
Eventually, India should feel the pinch of oil price hike and inflation. Arab nations are the major suppliers of crude oil to India. Oil is the second biggest energy source for India, after coal. It accounts for nearly one-third of total energy in the country. Larger share of oil energy is used for transportation. Given these, the oil crisis could emerge as an important burden on inflation in the country.
Currently, the Arab world supplies more than 55 percent of India’s total import of crude oil. India is an oil import dependent nation. More than 90 percent of crude oil requirement is met by imports. Import dependency is inelastic due to paucity of oil minerals domestically.
Till now, the global oil crisis erupted irrespective of any difference of schism in Muslim religion, viz , Shia and Sunni. It is argued that the age long religious contention between Shia and Sunni, will likely play a role in the oil price hikes, had the Arab world joined the war.
Palestine is Sunni dominated population (nearly 98 percent). India imports crude oil largely from Sunni based nations. For instance, Saudi Arabia, Kuwait and UAE are the major suppliers of crude oil to India and they have a Sunni dominated Muslim population. Therefore, if the Arab world joins the war, India is likely to fall into an oil crisis, the analysts argued.
Nevertheless, there is a sign of relief. Even though concerns are looming over oil crisis due to war, Russia could emerge as a major shield to India. Owing to the global sanctions in the wake of the Russia-Ukraine war, oil imports from Russia jumped more than ten times. It increased by 1175 percent in 2022-2023, to 50.8 million tonnes from merely 4.3 million tonnes in the preceding year. It accounted for 21.4 percent of total crude oil import by India.
Dependency on Russian oil surged, given that Russia-Ukraine continued. During the first five months of 2023-24 (April-August), Import of Russian crude oil increased by 208 percent over the preceding period in 2022-23. In both the years, viz. 2022-23 and 2023- 2024 (April-August), Russia emerged the biggest supplier of crude oil to India. Dependency on Russian crude oil increased from 21.4 percent in 2022-23 to 40 percent in 2023- 2024 (April-August).
In contrast, import of oil from the Arab world declined. During the two years period of 2022-23 and 2023-2024 ( April-August) , imports of oil from Saudi Arabia, Kuwait and Iraq receded. This translates a backtrack in India’s import dependency for oil on the Arab world.
Russian oil was cheapest amongst all during these years. During the 5 months period of 2023 -2024, the average Russian crude oil import was priced at $68.7 per barrel, against Saudi Arabia at $ 87.0 per barrel, Iraq at $ 75.9 per barrel and both Kuwait and UAE at $89.7 per barrel.
Therefore, Even though concerns loom large over the global oil crisis due to the Hamas-Israel war, Russia-Ukraine war may emerge a major insulation to India.
Nevertheless, If Egypt joins the war, concerns are raised over the blockage of Suez Canal. With war razing Egypt, fears are mounted over the transhipment of India’s merchandise trade. The Suez Canal is vital for India to trade with the USA, EU and Latin America. It is about 7,000 km shorter than the Cape route to link Asia and the west. Annually, about US $ 200 billion worth merchandise or 20 percent of India’s total trade, is routed through Suez Canal. This means any blockage of the Suez Canal due to Egypt joining the war could cause a major dent to India’s supply chain and exports.
Concerns are also raised over the fate of thousands of Indians working in the Middle East, if the war breaks. Nearly 66 percent of NRIs abroad are in Gulf countries. Most of these are employed in construction related infrastructure , petroleum and petrochemical industries.
To this end, the major issue awaiting the spillover impact on India is whether the Arab world joins the war. So far , the threat of Arab joining the war is in the air. More than a month has passed, and so far no Arab nation declared war against Israel officially, even Iran, which has been in the forefront, dithers to declare war officially.
Subrata Majumder is a former advisor to JETRO – Japan External Trade Organization, under The Ministry of Economy, Trade and Industry (METI), Government of Japan.