After the simultaneous drone attacks on the Abqaiq and Khurais facilities of the world’s largest petroleum producer, Aramco, Saudi Arabia has suspended its production by 5.7 million barrels of crude oil per day, which is almost half of its daily output. Its previous capacity could be restored by the end of September according to a statement released by the minister of energy.
After Iraq, Saudi Arabia is India’s second-largest source of oil, contributing around 20% of total oil imports last year. With this disruption, India has good reason to worry, given its dependence on overseas markets to meet its domestic energy needs, where around 80% of its oil consumption is fulfilled by imports. Moreover, persistent disruptions in supply could cause increases in the prices of petroleum products in the domestic market, potentially slowing down the already stumbling Indian economy.
With such major dependence, India cannot afford any disturbance in the oil supply from another major country, as it has already stopped the imports of Iranian oil and reduced those from Venezuela by following US sanctions. Iran was the third-largest supplier of oil to India, at 14% of its total imports in 2018. Although Saudi Arabia has increased its supply while Angola and Mexico have emerged as other major suppliers to cover the shortfall caused by its self-imposed embargo on oil from Iran and Venezuela, India is still stuck in a challenge to ensure the oil supply.
The faltering Indian economy is already showing signs of recession, with annualized growth plunging to 5%, the lowest in six years, and could be further rattled by an abrupt spiral in oil prices. The BSE (Bombay Stock Exchange) Sensex has plummeted and the value of the rupee has depreciated further after the Aramco attack on September 14. Reserve Bank of India governor Shaktikanta Das expressed his worries during a television interview that “this will have some impact on the current account deficit and further perhaps on the fiscal deficit if it lasts longer.”
In the aftermath of the Aramco attack, India has more worries from the probability of a full-fledged war in the Middle East, since the US and Saudi Arabia have fingered Iran as a major conspirator directly or indirectly behind this attack and wish to take revenge. Iran has denied any role in the attack. Such hostility in the region could adversely affect the supply of oil and have a large impact on those countries that are dependent on the oil trade to fulfill their domestic needs, such as India. The Middle East, a region that contributed 70% of the $92 billion worth of oil imported by India during 2018, is divided between the different blocs led by Saudi Arabia and Iran, so it would be challenging for India to maintain aa diplomatic equilibrium with all these embattled countries.
India produces very little of its own oil, and is thus the third-largest global importer after China and the US, which cannot be sustained without an adequate external supply. India’s dependence on oil is reflected through a global comparison of production and consumption: it produced 0.9% of the world’s oil while consuming around 5.2% during the year 2018. To reduce this dependency, India is pondering an increase in the domestic capacity for oil production while also developing alternative, non-conventional energy sources like solar and maximizing the use of electric vehicles. In the meantime, to deal with the uncertainties of a restive Middle East, India is also seeking alternative sources of oil, as its Minister of Petroleum Dharmendra Pradhan has visited Russia to discuss increasing its oil export to India.