US ends waiver for Iranian oil

• Trump administration has decided no longer renew exemptions for importing Iranian oil and has threatened sanctions on nations importing it after May 2, 2019.
• Six months of waivers, known as Significant Reduction Exceptions (SRE),was granted to Iran’s eight biggest buyers (including China and India) of crude to continue to import limited volumesafter the US pulled out of its n-deal with Iran in 2018.
• Among these eight buyers, Greece, Italy and Taiwan have stopped importing Iranian oil, while others, except China, are seeking waivers to be extended. China remains defiant.

About

• Since beginning, Trump administration has maintained a hawkish policy towards Iran, designed to bring an end to Iran’s destabilizing actions in the region, including its support for Hezbollah in Lebanon and Houthi rebels in Yemen.
• Targeting core areas of Iranian economy, in November 2018, after abandoning2015 nuclear deal, Mr Trump re-imposed sanctions on Iran's energy, ship building, shipping, and banking sectors.It was done to compel Iran to negotiate a "new deal" that would cover not only its nuclear activities, but also its ballistic missile programme.
• Recently, Iran’s Islamic Revolutionary Guards Corps (Presidential Guards) was designation as a foreign terrorist organization by the US administration.
• The current decisionis intended to bring Iran's oil exports to zero, denying the government its main source of revenue.
• Iran maintains that the sanctions areillegal and attaches "no value or credibility" to the waivers.
• The sanctions have led to a sharp downturn in Iran's economy, pushing the value of its currency to record lows, quadrupling its annual inflation rate, driving away foreign investors, and triggering protests.
• The complete ban on Iranian exports raises the prospect of retaliatory measuresby Iran, including blocking of oil tanker movements through the Strait of Hormuz, which has the potential to flare up oil prices.
• Iranian oil exports are currently estimated to be below 1 million barrels per day (bpd), compared to more than 2.5 million bpd before the US abandoned the nuclear deal.
• The decision is expected to impact India’s energy and economic security interests. On the up side, Trump administration has assured continuance of the exemption for development of the Chabahar port project.

Background

• Joint Comprehensive Plan of Action:In 2015, Iran agreed a long-term deal on its nuclear programme with the P5+1 group of world powers - the US, UK, France, China, Russia and Germany.It came after years of tension over Iran's alleged efforts to develop a nuclear weapon. Iran insisted that its nuclear programme was entirely peaceful, but the international community did not believe that.Under the accord, Iran agreed to limit its sensitive nuclear activities and allow in international inspectors in return for the lifting of crippling economic sanctions.
• Iran-US Conflict: It dates back to 1953 overthrow of the Iranian government by the US. 1979-80 Hostage crisis during the Islamic Revolution that ousted Shah of Iran from power and established a clerical regime in Iran four decades ago, remains the defining moment of their relationship.Following which, Iran’s nuclear program have cast a long shadow over any efforts at direct talks. Thus, their relations have been sporadic and marred by mutual distrust and debacles.

Why it matters to India?

• Dependence on Iran: India is the third largest importer of oil globally, importing around 70-80% of its oil requirement. In 2014-15, India used to import a majority (18.4%) of its total crude oil requirementfrom Saudi Arab with Iran at a distance 7th position contributing only 6% of India’s crude basket. However, Iran is now the third largest contributor to India’s energy security, contributing 11.3% of the country’s crude oil demand. 
• Special deals from Iran: Higher discounts, longer credit periods and better insurance and shipping deals by Iran has endeared it as India’s reliable oil suppliers. The substitute crude suppliers — Saudi Arabia, Kuwait, Iraq, Nigeria and the US — do not offer the attractive options.
• Sanction on Venezuela:The US has also asked India to reduce oil imports from Venezuela. The US targeting “illegitimate" regime of President Nicolas Maduro, accusing it of violence and obstructing international humanitarian assistance to the citizens of the country undergoing a socio-economic crisis.In 2014-15, Venezuela was the third largest supplier (12.1%) of crude oil to India. But by January 2019, it has dropped to fifth position(7.6%) mostly due to pressure from the US.
• Status of international oil prices:International oil prices havealready climbed $20 a barrel in 2019 following an agreement between the Organization of the Petroleum Exporting Countries (OPEC) cartel and its allies, including Russia, to cut their output by 1.2 million bpd.The surging prices of oil has always been an Achilles heel for the Indian economy.

Impact of high oil prices on India

• Current account deficit: Higher crude oil prices will widen the trade deficit and current account deficit for India. Every dollar increase in the price of oil raises India’s annual import bill by over Rs 10,500 crore. Thus, any spike in global crude prices in the absence of the Iranian cushion will have a bigger impact on India’s deficit numbers.
• Rupee: The currency could be impacted if the trade and current account deficits were to widen. An increase in the import bill will put pressure on the rupee.
• Inflation: There will be a significant impact on inflation based on how crude oil prices move and the extent to which the government allows the pass-through to the consumer.
• Fiscal impact: There could be a two pronged impact on government finances — both on the revenue side and on the expenditure side. On the revenue side, higher oil prices mean more revenue for the states as tax is ad valorem; for the Centre, though, it may not materially impact the fiscal math as the duty rates are fixed. In FY18, the government earned Rs 5.53 lakh crore, of which Rs 2.85 lakh crore was direct revenue as tax from oil products. In the case of states, it was Rs 2.08 lakh crore. Other incomes streams included tax payment by OMCs, dividend and profits.The expenditure impact would primarily be on account of fuel subsidy outlays.

India’s past response

As part of the diversification after re-imposition of sanction in November 2018, and to reduce tension with the Trump administration, whichhighlighting the trade surplus that India enjoyshas been accusing India of unfair trade practices,India imported crude from the US for the first time in 2017-18. India now imports 2.75%of its oil imports from the US.

But the effort did not stopped Trump administration from withdrawing zero duty benefits worth $5.6 billion to Indian exporters or ending the waiver from Iran sanctions.

Way forward for India

The challenge for Indiathis time is to secure an alternative supplier at competitive terms in an already tightening global situation. The projected drop in Iranian exports could further squeeze supply in a tight market — given the US has also sanctioned Venezuela, and the OPEC and allied producers including Russia have voluntarily cut output, which has pushed up oil prices more than 35% in 2019.

India claimsto be sufficiently prepared to deal with the impact of the US decision and a robust plan has been put in place for adequate supply of crude to refineries.Indian refiners are increasing their planned purchases from the Organisation of the Petroleum Exporting Countries (OPEC), Mexico, and even the US to make up for the loss of Iranian oil. India can further push Washington which has given its word to help India replace oil imports from Iran.

India can also leverage its improved relations with Saudi Arabia and the UAE to negotiate long-term alternatives to energy dependence on Iran.

Conclusion

This is not the first time that the conflict between Washington and Tehran is testing Indian foreign policy. India had managed to navigate the frequent crises around Iran with innovative diplomacy and much luck.India’s ties with Iran are significant and historic, and New Delhi will have to work hard to maintain some links like in the past.

Practice Question:

Surging oil prices have been an Achilles heel for the Indian economy. Discuss. Also, examine the impact of US’s termination of waiver for importing Iranian oilon India.