Energy prices in India have been going up because of certain geopolitical reasons, particularly because of the uncertainty over the supply of Iranian crude. Soaring prices have put Indian policymakers in a bind as the general public generally tries to corner the government on this, without realising that since much of India’s energy resources have to be imported, geopolitical situation along with international market rules play a crucial role in fixing energy prices.

The Iranian energy crunch, as happening since January 2018 has three-fold implications for global energy security. First, the spurt in the prices of oil in the international market is largely due to sanctions on both Russia and Iran, the two largest producers of global oil. Second, the American threat to take drastic measures against both Moscow and Teheran is generating apprehensions in the market on the secure supply of oil. Third, geopolitical conflicts in energy producing regions are adding to the present volatility.

As per an Energy Information Administration (EIA) 2017 report, Iran’s world ranking in the production of oil and gas is fourth and second, respectively. The report says that in the post-sanctions era, Iran’s foreign exchange revenue rose considerably and stood at US $57.7 billion because of energy exports.

The current turmoil stems from the Trump administration’s plan to impose sanctions on Iran for the latter’s failure to honour the Joint Plan of Action (JPOA) and the Joint Comprehensive Plan of Action (JCPOA), signed in 2015 for opening Iran’s so-called clandestine nuclear weapons complexes for international inspections. According to the US Treasury Department website, the new sanctions will come into effect from the first week of August, which is bound to have a significant impact on world energy trade. Iran is countering the US threat by mobilising its European allies. Iran has also threatened to close down the Strait of Hormuz through which the bulk of Arab oil passes. If Iran actually does this, that may lead to a limited war in the Persian Gulf region.

The turmoil thus will have a deep impact on the global energy scenario. One may underline here that though the European Union is considered to be an ally of the United States, it is feeling the maximum heat on this matter because after the 2014 Crimean impasse, the EU countries started diversifying their energy sources to Iran. As per recent statistics published by the European Commission Directorate of Trade (April 2018), energy trade between EU and Iran increased by around 111% in 2017. In 2014, the total value of EU’s energy import was 173 million euros, which rose to 8,999 million euros in 2017. It is because of this that the EU is seeking exemptions from the sanctions so that it gets an uninterrupted supply of energy from Iran. If the Iranian sanctions come into effect from August, then it will become a major flashpoint between the US and EU.

Russia, which is considered to be a staunch supporter of Iran, wants the latter to cooperate with international bodies for nuclear disarmament. The forthcoming meeting between Presidents Donald Trump and Vladimir Putin in Helsinki will clear much air over the Iranian impasse. Since Russia is under a spell of sanctions and Iran is also going to face sanctions, in such a situation, questions arise about the likely future of energy pricing. It has been reported that to overcome the crisis and to ensure uninterrupted supply of energy to the global market, the Trump administration urged OPEC members to raise production levels.

The crisis is, however, proving to be a blessing in disguise for US’ own energy sector. According to EIA data, in June 2018, the US exported around 2,336 billion barrels of oil per day. In 2017, even China imported around 7% of US oil.

The rise in energy prices is having a serious impact on India. As per EIA data, India is the fourth largest consumer of energy in the world. Because of geographical proximity, India sources the bulk of its energy requirements from West Asia, including Iran. In addition to this, New Delhi has many strategic interests in Iran such as the Chahbahar port and the International North South Transport Corridor (INSTC), which will connect India with Central Asia and Afghanistan. No wonder the US threat to put Iran under sanctions is making Indian policymakers apprehensive.

It has been reported that private energy players like Reliance and public sector undertaking Indian Oil are taking steps to address the issue so that any adverse impact can be minimised. At the same time, India is negotiating with the Arab world on securing additional oil from them. New Delhi is also constructing additional reserve points for stockpiling energy to meet its own future energy needs. India is also securing oil from the US. As per a report by Bloomberg (7 July 2018), in 2017, India imported around 4.7 million barrels of oil from the US. The report further envisaged that in case of any deterioration in US’ trade relations with China, Washington may be forced to sell additional energy to India. Thus, India-US energy relations can be a game changer in the longer run. Because of strong strategic partnership with the US, India can also pro-actively negotiate with it for seeking an exemption from Iranian sanctions.

The greatest achievement of the Narendra Modi government in achieving energy security is that when prices of oil plummeted in the international market, Indian energy conglomerates went on a buying spree of stakes in the oil rich regions of Latin America, Africa and Eurasia. For instance, in the Siberian and Far East regions of Russia, Indian energy conglomerates won some lucrative energy blocks like the one in Vankor. In case of a future energy crisis, New Delhi can sell the same oil in the international market and generate foreign exchange. To an extent, this will help in meeting domestic demand, though in monetary terms. India is also focusing on renewable energy and has set itself a target of achieving 175 GW of energy from renewables by 2022.

So India is in a position to meet its energy requirements despite the many odds. Washington too cannot keep its European allies unhappy for long. One agrees with the view that if the Iranian crisis prolongs then energy dependent blocs and countries such as the EU, India and Japan will come together. Even the “hegemon” China may be forced to behave like a “normal power”.  “Energy interdependency” may thus create a new world order.

One hopes that the crisis will be influenced by market rules and will not last long.

Nalin Kumar Mohapatra teaches at the School of International Studies, Jawaharlal Nehru University, New Delhi.

 

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