Go for Iran oil if it keeps the price line low?

By Dr Bharat Jhunjh

The United States has asked India to reduce imports of oil from Iran. Doing this is difficult for us because our energy consumption is rising fast. We are importing 70 per cent of the oil we consume. Of this, 12 per cent comes from Iran. India has recently made efforts to increase imports from Nigeria, Sudan and Central Asian countries but supply from these sources is small.

Saudi Arabia has offered to assist India in meeting shortfall due to reduced purchases from Iran but this involves yet greater dependence on a single country. This can be disastrous should that relationship go sour. The situation is made worse by reduction in global production of oil. It is estimated that a reduction of 1-2 per cent per year is taking place after 2010. Oil futures are going up. This indicates an impending shortage. Challenge before India is to meet her increasing energy requirements in face of contracting global supply.

The United States is irked by Iran’s alleged nuclear weapons programme. Iran has signed the Nuclear Non-Proliferation Treaty (NPT) which binds it not to produce nuclear weapons. Iran has gained access to nuclear technology by signing the NPT. The US allegation is that having acquired the nuclear technology under the umbrella of NPT, Iran is using that technology to enrich uranium to weapons grade in violation of the Treaty. But Iran says it is not producing weapons. It is difficult to conclusively establish the case on either side. Hence we have to take a decision within this uncertainty.

The US strategy appears to be aimed at inciting the Iranian middle class to revolt against its hard line government. The US does not want to impose a total embargo on trade and sink the country into distress. The US has learnt hard lessons of such an approach with North Korea. Such an embargo led to acute shortage of fuel and fertiliser in that country. That led to declining food production, famine and large scale deaths. Ultimately, the world community had to step in and supply food aid. The North Korean Government did not flinch a bit. The US does not want to repeat that experience. Military action too appears to be ruled out. Iran is a much bigger country than Iraq. Capital Tehran is located far away from the coast. Iran has developed a huge armaments production industry after its war with Iraq. Moreover, any military action may be perceived as an anti-Muslim measure and bring forth retaliation.

The US strategy seems to be to deprive Iran of the conveniences of the middle class. Iran imports goods like electronic devices which are mostly consumed by the middle class. Payments for these are made from petrodollars earned from oil exports. It is becoming difficult for Iran to earn petrodollars. The Iranian Rial is devaluing rapidly. The official exchange rate has been reduced from 9,000 Rial per dollar to 12,600 Rial recently. However, the exchange rate on the grey market is reported to be 23,000 Rial. This has made imports expensive and deprived the middle class of these conveniences. The US hope is that the middle class will revolt against its Government in face of these hardships.

The US is asking countries that import oil from Iran to cut the quantities so that pressure mounts on Iran from all directions. Presently India, China and Japan are major importers of Iranian oil. They account for 45 per cent of Iran’s exports. Reportedly, the US and Japan have reached an agreement under which Japan will reduce its imports by 11 per cent. Notwithstanding public statement by Finance Minister Pranab Mukherjee to the contrary, Government of India has also reportedly asked oil importing  Public Sector Undertakings to cut imports from Iran by 10 per cent. Whether this has been done under US nudging is anybody’s guess. Europe has already stopped importing oil from Iran. Unsold stocks of oil are mounting with Iran. Pressure is undoubtedly mounting on the Iranian people but whether this will translate into agitation for or against the Government is to be seen. The Iranian people had occupied the American embassy in the seventies in similar circumstances.

In these uncertain circumstances the question before us is whether to cut imports from Iran or not. First point is regarding energy security. It will be difficult to meet the shortfall due to reduced imports from Iran. We will have to purchase oil at higher price. Second, we may lose our foothold on Afghanistan. It will be difficult for India to sustain her influence in Afghanistan against the combined pressure of Pakistan and Iran. Japan is placed differently than us on this count. It is likely to face no defense fallout of an anti-Iran posture. Third, we stand to gain from Iran’s offer to accept 45 per cent of the payment in rupees. This will help boost our exports and help bridge our increasing current account deficit.

Fourth is the fallout of impact of the crisis on the global economy. Throttling supplies from Iran will lead to increase in price of oil unless Saudi Arabia steps in a big way to pump out equivalent amount of oil in addition to present production. An increase in price will affect all oil importing countries, including most OECD countries, adversely. At the same time it will be equally beneficial for the oil exporting countries including Venezuela, Nigeria and Russia. This may lead to recession in the developed countries. However, in my reckoning, the net impact on the world economy will be small. The centre of economic power will shift from the importing to exporting countries. Loss of purchasing power of Germany will be made up by increase in purchasing power of Venesuela. Nevertheless this will impact India negatively through higher oil prices.

Fifth point is of lesser inflows of foreign capital and access to advanced technologies from the United States and Europe. Refusal to toe the US line will deprive us of these benefits. However, the impact of reduced capital flows is likely to be small because it will be partly neutralised by increased flow of petrodollars. Yet, there will be some negative impact that has to be taken on board.

My assessment is that continuation of imports from Iran will provide us benefits in energy security and increased exports from rupee payments. On the flip side we stand to lose from higher oil prices, reduced inflow of capital and access to technologies. In this balance, I would vote to cooperation with Iran.

Ultimately we will have to reduce consumption of oil. We cannot be energy-secure if our consumption exceeds our production hugely. We should create two distinct streams for consumption of energy like we have red and blue LPG cylinders for domestic and commercial use. Energy prices must be kept low for essential services like the railways but should be increased for commercial consumption. We should not jeopardise our economic sovereignty by fostering dependence on imports to run air-conditioners of shopping malls.?unwala?