A mega energy crisis stares at us

As the US-Israeli war against Iran drags beyond its first month on Tuesday, an energy crisis, perhaps severest in history, stares the world. There is all likelihood of oil prices touching $200 per barrel signaling extreme risks for the global economy. There has been a 55 per cent spike in global oil prices—from $85-90 per barrel a month ago to $112 now—but one can still take solace that they are way below 2008 prices i.e., $147.50. European nations have taken the brunt as natural gas prices have gone up by 70 per cent. Europe is also likely to face diesel shortage in the weak ahead. If estimates released by Bloomberg are any indication, global oil supplies have declined by 11.1 million barrel per day since the closure of the Strait of Hormuz.

The average supplies through Hormuz were 106.9 barrel per day prior to the war. But the closure of the waterway by Iran has curtailed the supplies by 18.4 million barrels per day. Total Energies chairman and chief executive officer Patrick Pouyanne has warned of severe crisis for the global economy due to the closure of Hormuz which provides the passage for 20 per cent of the global energy supplies. The decline in oil production from the nations around the Persian Gulf amounts to more than total consumption by economies of Britain, France, Germany, Spain and Italy.

The United States and a few other nations have ordered some release from their oil stocks in order to hold the international oil price line. Iran too has allowed passage for tankers from the friendly nations. But the measures will have only a limited impact. The prices in the world oil market have been constantly spiraling. The Saudi government’s bid to divert transport of 60 per cent of its oil export through trans-desert pipeline to Yanbu in the Red Sea is in progress and could mitigate the global deficit to certain extent.

The nations between Thailand and Pakistan are likely to be worst hit if the current oil crisis worsens in the wake of the conflict continuing. India has done well by cutting down the excise to keep the domestic fuel prices stable in the wake of surge of global prices. The cuts would protect the domestic consumers from the impact of global surge in prices and insulate them from the global oil shock. The relief for the masses however will translate to enormous fiscal cost to the nation. Given this scenario, long-term challenges still need to be addressed.

Excise cut is a short-term buffer and doesn’t address the overall vulnerability to energy price shocks. What remains unarguable is that the Government would need to reduce the dependence on the imported fossil fuels which is the most durable way to protect economy from geopolitical energy disruptions. It is time exploring alternative fuels like ethanol, shifting to electric vehicles and expanding the solar power coverage for home.