Chennai, March 2 (.) The US-Iran-Israel war, with Iran’s missile and drone strikes on multiple Gulf Cooperation Council (GCC) states beyond US and Israeli military targets, makes this conflict much more serious than last year’s bombings or earlier conflicts like the Israel-Palestine and the Russia-Ukraine war, said a top economist at Emkay Global Financial Services.
“If the Middle East tensions persist, elevated oil prices would directly transmit into higher input costs and financial markets and macro stability could deteriorate. For every $1/bbl increase in Brent, we estimate an impact of about Rs 0.52/litre on diesel and about Rs 0.55/litre on petrol retail prices,” said Madhavi Arora, Chief Economist.
“On the fiscal response, it is premature to take a definitive view. However, at this stage, we do not expect the government to cut excise duties to absorb part of the burden faced by oil marketing companies,” Arora added.
Notably, every Rs1/litre cut in excise implies an annualised fiscal hit of about Rs150 billion.
Citing her company’s energy team’s views Arora said, oil marketing companies remain relatively well cushioned, with earnings from other business segments helping offset oil marketing losses, reducing the likelihood of a government taking the hit on its books at this point.
Assuming about $10/bbl deviation from the baseline assumption of $65/bbl, the eventual balance sheet and fiscal and inflationary impact will hinge on how the burden is shared between the government, oil marketing companies and end-consumers, Arora said.
“Meanwhile, every $10/bbl increase in crude prices is likely to widen the current account deficit/gross domestic product by about 0.5%, exerting additional pressure on the external balance, while retail/wholesale price index inflation may bear about 35bps/130bps impact and growth could be hit by 15-20bps, ceteris paribus (all other things being equal),” Arora remarked.
Rising Middle East tensions raise risks of global supply chains and shipping disruptions, higher global freight and insurance costs, even without a full blockade.
Arora hopes that the conflict to be relatively short-lived, given the ‘marked power imbalance’ in military capabilities between the parties involved.
India procures sizeable part of its oil from Middle East, which comes through Strait of Hormuz, hence there is both oil price and supply risks.
According to energy analysts at Emkay Global India’s crude and LNG supplies remain largely intact. India also retains adequate buffers through diversified sourcing, strategic reserves, and operational inventories, which should help cushion any short-term disruptions.
Should the situation stabilise — alongside OPEC plus signaling a sharp output increase of 0.4mb/d — and oil prices fail to sustain a spike amid comfortable demand-supply dynamics, the broader macro impact is likely to remain contained, Arora said.
. VJ IM