Some appeals are more critical than others. Those that cut oil and gas consumption and save foreign exchange are strategic, relatively easy to adopt and align with climate goals. Others could be replaced by stronger policy tools. The closure of the Strait of Hormuz has resulted in a loss of 20 per cent of global oil supplies. In fact, the government tried to limit the consumption of the most critical product, LPG, by restricting it to mostly domestic consumers soon after the war started. We know the resultant havoc.
Glaring Current Account Deficit
India imports 89 per cent oil, 50 per cent natural gas and 70 per cent urea from Gulf countries. The closure of the Strait of Hormuz chokes these supply lines, creating two major problems. First, physical shortages and a surge in foreign exchange demand due to higher prices. Assume India imports oil at USD 110 per barrel for the rest of the year. The additional foreign exchange burden would be about USD 59 billion. If the conflict worsens, oil could exceed USD 200 per barrel.
This estimate is based on my experience of working for a large MNC oil company during the first two oil shocks in 1973 and 1978. Back then, supply losses were far below today’s estimated 10 million barrels per day, yet prices jumped 400 per cent and 300 per cent, respectively. At USD 200 per barrel, India’s added foreign exchange requirement would reach USD 355 billion, up USD 218 billion from the previous year. India can hardly afford that. This scenario analysis, likely, prompted Modi’s urgent appeal. Whether we like it or not, we are in a war-like situation. We must set aside political differences and prepare to face the crisis together.
Rupee at Rs 110 against a dollar!
Already, the rupee has fallen from Rs 91 at the end of February to Rs 96 per dollar. It is Asia’s worst-performing currency this year. If the oil price were to increase to USD 200 per barrel, more than likely it would fall to below Rs 110 rupees per dollar. The current account deficit will also be in a worse condition. After oil prices started to increase, to help consumers, the government reduced excise taxes on petrol and diesel. Also, it did not allow the oil companies to increase prices till 15 May. Finally, oil companies were allowed to increase fuel prices the first hike in 4 years. Still every week oil companies are losing about Rs 3000 crore.
Oil companies are supposedly free to fix prices. But in reality, public sector oil companies are under the control of the petroleum ministry. It is often mentioned that we should not allow a crisis to go to waste. It is time to implement energy-saving strategies and build on them to address the existential climate challenge.
The author has over 50 years of experience in the international oil industry and served as a member on the Exploration Advisory Committee to ONGC.