An oil market pushback may have made Trump call for an Israel-Iran ceasefire
The threat of inflamed oil prices might have helped nudge the US president to push West Asia’s warring sides into a ceasefire. Expensive oil is a significant economic risk—and a reminder for India to reduce its energy import dependency.
One of the many reasons that US President Donald Trump announced a sudden ceasefire between Israel and Iran, taking the world and visibly also the two warring sides by surprise, was probably the worry of where wider warfare would send crude oil prices. A closure of the Strait of Hormuz or oil rigs being set ablaze could have stoked inflationary pressures in an economy already under the foreshadow of inflation, thanks to tariffs. Cost-of-living risks have forced the US Fed to keep the cost of money higher than it may otherwise have been.
This is the second time that Trump’s approach to world affairs seems to have shown sensitivity to markets. In April, his tariff hold-off followed bond market shudders as participants grew what he called “yippy."
Also Read: Post-ceasefire hangover: The world is awash in crude oil right now
This summer, his push for a truce was plausibly—if partly—nudged by the relevance of oil to the global economy, America’s included. India’s exposure to the threat of a global oil squeeze is especially high, given our increasing dependency on imports, despite attempts to diversify away from hydrocarbons towards renewable sources of energy.
Fortunately, the global oil market proved fairly resilient during the 12-day war. After an initial spike that took Brent crude to the $80 per barrel zone on fears of disrupted supply (and then another), this price had settled around the mid-$60s by Tuesday.
Yet, while the world at large heaved a sigh of relief at this return to normalcy soon after the US joined Israel’s campaign and Iran made a display of missiles aimed at its base in Qatar, the market remains on edge, watching to see if the ceasefire holds and if the region flares up again. All this uncertainty is all the more reason for us in India to accelerate our energy transition away from oil and gas.
Also Read: Mint Quick Edit | West Asia’s ceasefire: The oil market got lucky
Unfortunately, that remains a pipe-dream. According to the Petroleum Planning & Analysis Cell, our crude oil import dependency has touched 87-88% of annual demand. Projections suggest it may overshoot 90% by the turn of this decade, which could mean a daunting energy import bill of $1 trillion over the next five years.
Even as we burn more fuel, domestic production has been dropping. Our crude oil output has fallen from over 36.9 million tonnes in 2015-16 to just 29.7 million tonnes in 2023-24. This is odd, since India holds significant hydrocarbon potential: an estimated 210 billion barrels of oil and oil-equivalent gas across 3.1 million sq. km of sedimentary basins. Only half this area has been explored.
As pointed out by Vijay L. Kelkar and Rahool S. Pai Panandikar in a Mint op-ed, without aggressive efforts to explore and develop these reserves, they will simply go unexploited. It may be time for Indian policy to consider re-adopting production sharing contracts with private explorers, especially for frontier and high-risk basins.
Also Read: Javier Blas: An Israel-Iran war may not rattle the oil market
Three-digit oil prices can hurt government finances. If inflated import bills spill over to stoke local inflation, it would limit the scope for monetary policy to support the economy’s growth. Although the Centre disbanded direct price controls long ago, it can intervene to keep fuel prices down. But a retail cushion against an oil shock entails a fiscal cost. A sustained bout of overpriced oil could strain our external balance of payments too.
This should goad us to oil-proof the economy. India’s shift to eco-friendly wind, solar and hydro energy has begun to clean up our power grid. But we still have a long way to go before we fully de-risk our economy. Till then, oil volatility could keep nerves taut.
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