Crude oil surge may inflate India's import bill by over $70 billion

A report by Prabhudas Lilladher warns crude oil prices, driven up by the West Asia conflict, won't return to $65/barrel soon. This surge is set to inflate India's annual import bill by over $70 billion, impacting inflation and manufacturing.

Crude oil prices have risen sharply due to the ongoing West Asia conflict and are not expected to return to the earlier level of $65 per barrel in the near term, according to a report by brokerage firm Prabhudas Lilladher.

The report noted that the increase in prices is likely to persist, keeping India's import bill elevated for the coming months. "We believe crude prices are unlikely to revert to pre-Gulf war conflict levels of USD65/barrel," the report said.

India buys around 4.3 million barrels of crude every single day. That adds up to about $180 billion a year. With prices now much higher, Prabhudas Lilladher estimates India's oil import bill could jump by more than $70 billion a year.

Impact on India's Import Bill

"The current spike in crude prices is likely to inflate India's import bill by more than USD70bn/annum," the report said.

Global Supply Shocks and Rising Costs

About 20% of the world's crude oil moves through the Strait of Hormuz. "Shipping route from Strait of Hormuz is critical for maintaining oil prices within a comfortable range and this remains a big uncertainty as of now," the report noted.

"Further escalation of hostilities and any impact on Bab Al-Mandeb can further squeeze oil supplies and push prices up."

The brokerage noted that the war hasn't just hit tankers and routes. Several global natural gas and oil refineries have been destroyed. These aren't easy to fix. "Several global natural gas and oil refineries have been destroyed and would take quite a bit of time to come back to stream/normalise operation," the report said.

When supply takes a hit and takes time to rebuild, prices stay high. Even if the tensions between the US and Iran deescalate, freight charges, insurance costs, and tanker availability have all spiked and likely to remain at these levels for long. "There has been spike in costs of freight, Insurance and availability of tankers," the report said. These add to the final price of oil even before it reaches India.

Domestic Impact and Consumer Pain

The government did cut excise duty by Rs 10 earlier, which delayed the pain for consumers. But prices of aviation fuel and LPG have already gone up multiple times. Petrol and diesel hikes look likely once state elections are over, the brokerage said.

India's Response and Economic Resilience

To manage the shock, India will try to buy more oil and gas from other countries. "We expect India to diversify its imports sources with higher imports from US, Russia, Norway, Australia etc. for both crude oil and Gas," the report said.

Supply chains may adjust in a few weeks, but the overall price level is expected to stay elevated. However, the brokerage noted that India is now less dependent on oil than before. Oil and gas imports used to be 6.8-7.3% of GDP 10-15 years ago. Now they are around 3.8% of GDP. So the impact of this price spike will be less than past oil shocks. But it won't be painless.

Ripple Effects on Indian Economy

"We expect second level impact of higher crude prices to affect inflation, demand and manufacturing in the coming months."

The brokerage further added that the war broke the supply chain, damaged refineries, and made shipping risky and expensive. Even if peace comes, it will take months to fix all that. (ANI)

(Except for the headline, this story has not been edited by Asianet Newsable English staff and is published from a syndicated feed.)