‘Government monitoring oil situation, confident supply won’t be cut’

NEW DELHI: Global oil prices spiked the most since the 1991 Gulf war on Monday, sparking worries of an extended spell of market volatility hitting consumer sentiment by pushing up fuel prices and posing fresh challenges to the government’s recent efforts to revive the pace of economic growth.Global benchmark Brent crude rose 19% to almost $72 per barrel after the market opened for the first time after the drone strike at the heart of Saudi Arabia’s oil industry . The attack knocked out half of the Opec lynchpin’s production, or roughly 6% of daily global supply.According to the International Energy Agency , the Saudi outage surpassed the loss of Kuwaiti and Iraqi oil output in August 1990, when Saddam Hussein invaded his neighbour. It also exceeds the loss of Iranian oil production in 1979 during the Islamic Revolution. However, a Bloomberg report quoted Opec secretary general Mohammed Barkindo as saying there was no need for panic.Oil minister Dharmendra Pradhan stepped in to dispel nervousness over possible supply disruption. However, analysts warned that an extended period of high oil prices could hurt India’s economic growth as it imports 83% of its crude requirement.The Indian ambassador in Riyadh contacted the senior management of Aramco to ensure steady supply to India. We have reviewed our overall crude oil supplies for September with our oil marketing companies. We are confident there will be no supply disruption to India. We are closely monitoring the situation,” oil minister Dharmendra Pradhan tweeted on Monday.The high inventory of Saudi crude with Indian refiners and shipments on the way may take care of supply issues for now. Reports suggest Saudi Arabia will restore a third of the lost output within days but a full restoration may take longer. So, beyond a point, repercussions of the Saudi outage for India will be economic, rather than just on the supply side. K Ravichandran of rating agency ICRA reckons the attacks have made markets nervous and will add “a sizeable geopolitical risk premium” to oil prices “which will be negative for Indian consumers”.An extended period of high oil prices will hurt India’s economic growth as the country imports 83% of its crude requirement. Every $1 appreciation in Brent price inflates the oil import bill by $2 billion. Investment bankers reckon a 10% rise in oil prices widens India’s current account deficit by 0.4-0.5% of GDP. In 2018-19, India imported 207.3 million tonnes of oil.The Centre doesn’t directly import oil but costlier crude still impacts government maths. The current account deficit widens as the rupee weakens due to higher demand for dollar. The subsidy bill and inflation, which has a bearing on interest rates, also rise. All of these end up squeezing the government’s ability to spend on social sector schemes or sops to revive the economy.High oil prices, if not tamed, will over a period of time suppress demand and raise input cost for farmers and industry.