The unprecedented drone attack on the oil facilities of Saudi Arabia’s Aramco shook the world markets. Apart from the geo-political risk that could follow, it can have serious economic implications.
Saudi Arabia is the leading oil producer accounting for 10 percent of the global oil supply. The attack has hit more than half of Saudi Arabia’s crude production translating to 5 percent of the total global crude production.
The crude oil prices surged by around 20 percent on 16th September, one of the largest spikes in the recent years. The incident has created a panic among the investors and consumers on the possible volatility in the crude market.
India should be cautious, being the third largest importer of crude oil. India relies on imports for around 80 percent of its oil needs. In FY20, India imported around USD 141 billion worth of Petroleum crude and products (POL), registering a growth rate of around 30 percent from the previous fiscal. Though Aramco has assured that there will be no disruption in the supply, India should prepare herself for the different scenarios that might emerge.
The timing of the incident is crucial for the Indian economy, passing through a phase of economic slowdown. The crude oil price exerts greater influence in determining the price of other commodities. Higher crude oil price could lead to an increase in the general price level.
At present, RBI has enough headroom to focus on growth as inflation is within the permissible level. However, rising crude oil price could lead to imported inflation, forcing the Central Bank to switch its focus to controlling inflation. In such a scenario, RBI has to withdraw from further cutting the rates and initiate steps to control inflation.
The rising crude price could lead to widening of current account deficit. In India, the export sector has been underperforming due to domestic and global reasons. The developments in the global economy is not welcoming for the export sector. The rise in the import bill without any corresponding increase in the export will add more pressure on the current account deficit. Similarly, the spike in the crude prices can also make the attainment of fiscal deficit target a cumbersome task for the government. Considering the present economic scenario, the turnout of these events could do more damage to the domestic economy.
The question is how long it will take Saudi Arabia to resume its production. The share of Saudi Arabia in the total imports of the POL to India stands at around 17 percent. India used to import around 10 percent of its crude demand from Iran. However, with the US sanction against Iran, India stopped purchasing crude oil from Iran. Thus, resumption of crude production by Saudi Arabia is important to normalise the situation in the market. We need to also factor in the geopolitical tensions that could arise in the Middle East region as a fallout of this incident.