Saudi drone strikes: Rising oil prices will impact India’s economic growth

India’s strategic pivot away from fossil fuels is fast emerging an important economic necessity. As long as oil prices remain high,import-dependent India’s economy looks set to struggle

Representative image
Representative image
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Nantoo Banerjee/IPA

After the economic slowdown comes the oil shock. The multiple drone strikes on Saudi Aramco’s two major oil facilities have already cut down Saudi Arabia’s oil production by 5.7 million barrels a day, accounting for nearly five percent of the world crude oil supply and almost half of Saudi oil production. India is highly concerned for two reasons: The country is nearly 85 percent dependent on imported oil, and, Saudi Arabia is India’s second largest source of oil and gas supplies.

The Saudi oil crisis has already pushed India's petrol and diesel prices to its highest level since this year’s first budget. If higher oil import costs continue through the second half (October-March) of the current financial year, it is bound to have a major bearing on domestic industry and consumption. The economy is already reeling under a recessionary pressure. Its early recovery looks almost impossible under these circumstances. The development, coming closely to the US trade embargo on Iran, has triggered panic among global traders, who expect a sharp rise in oil prices if Saudi Arabia fails to restore its full oil production capacity within a few weeks.

Data from the petroleum ministry shows that India's dependence on imported oil is steadily growing as the domestic oil output remains downward since 2015-16. India’s crude oil production in 2018-19 dropped to 34 million tonnes from 36.9 million tonnes in 2015-16. Last year, India's oil consumption had gone up to 211.6 million tonnes.

Higher oil prices will further widen India's current account deficit. It is said that every dollar increase in Brent crude prices adds around $2 billion to India's oil import bill. In 2018-19, India spent $111.9 billion on oil imports. Thus, an extended oil crisis could make India's economic recovery and higher GDP growth difficult. Higher oil price will also adversely impact the global trade and economic growth. Domestic prices of goods in petroleum import-dependent countries will go up, impacting both local consumption and exports. Employment and income will be further under pressure.

Economists and market researchers have long established links between oil price and economic growth. They recognise that crude oil is still a critical driver of the world economy. Oil price changes have significant impacts on economic growth, development, and welfare in countries around the world.

Many studies have documented how oil price movements have influenced economies — developed as well as developing — leading to adverse effect on macroeconomic indicators, especially GDP. Taking this argument further, a new paper by Rentschler investigates the role of oil price volatility in Germany, India, Japan, the Republic of Korea, Malaysia, and the United States. Reports show that while previous results suggest that some countries (typically net oil exporters) can benefit from higher oil prices, evidence exists that an increase in oil price volatility also brings negative economic effects on various types of economies, including net oil exporters.


The paper argues that a rise in oil price volatility increases perceived price uncertainty for all countries — regardless of their trade balance — thus reducing planning horizons, causing firms to postpone investments, and potentially requiring expensive reallocation of resources. Formulating robust national budgets becomes more difficult: “oil importers face uncertainty about import costs and fuel subsidy levels, and oil exporters face volatile revenues.”

India is the world’s third largest oil importer after China and the United States. However, the US remains the world’s biggest oil-consuming country, gobbling up 19.88 million barrels of oil per day (mbd) in 2017. This accounted for nearly 20.2 percent of the world’s total oil consumption per day, according to the research unit of CEOWORLD magazine.

China’s oil consumption stood at 12.79 mbd in 2017, accounting for about 13 percent of the world’s total oil consumption making it the second biggest oil consumer after the US. Among the top five global oil consumers, third placed India accounted for 4.69 million barrels of oil per day; Japan 3.98 million barrels and Saudi Arabia 3.91 million barrels per day. Together, these five countries suck up over 45 million barrels of oil every day. Thus, just only five nations account for more than 46 percent of global oil consumption.

Can India cut down oil consumption? Yes, it can. This is by vastly increasing the use of electric transport system, including a large systematic expansion of the metro railway networks and also by making the use of private cars and public parking system highly expensive as it exists in oil-starved Singapore for many years.

Lobbying groups are constantly raising pressure on the government to invest some of its tax earnings from petroleum and diesel into the overcrowded public transport systems in all of India’s large cities. The metro systems of Delhi, Mumbai, Chennai, Kolkata and Bengaluru provide the best transport network for locals to avoid both congestion and pollution. The reach of these metro services needs to be vastly expanded and more cities should to be brought under the metro system.

Meanwhile, India could also invite China in an oil diplomacy to force lower global oil prices. The two countries together account for almost 18 percent of world oil consumption. The market giants could establish a bilateral agreement that would give the two nations the necessary clout to reduce the cost of oil from OPEC members.

Another, more sustainable, option is to stop relying so heavily on fossil fuels and shift investment toward the development of renewable energies. India is said to be already a significant developer of new technologies, with high hopes of manufacturing a large fleet of electric cars in the coming years.

Unfortunately, there is still no indication that Prime Minister Narendra Modi’s promise to make most new vehicles electric by 2030 will be successful. India’s strategic pivot away from fossil fuels is fast emerging an important economic necessity. As long as oil prices remain high, import-dependent India’s economy looks set to struggle.


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