Iran's tension can raise fuel prices, the phantom bet to boost the economy

NEW DELHI: World oil prices rose 4% on Friday as tensions rose in the Middle East, which sparked concerns over a prolonged period of market volatility that hit consumer sentiment as fuel prices rose and mitigate government efforts to revive the pace of economic growth. . International Reference Point Brent raw It shot 4% toward $ 70 per barrel before settling at $ 68.76 when the market got nervous about the possibility of Iran blocking Strait of Hormuz , a vital shipping route for world oil trade, to retaliate against the United States that kill one of its main military commanders.

As the world's third largest oil buyer, India is vulnerable to tensions in the Middle East for two reasons. One is, of course, the price factor and its impact on the country's economy and consumer sentiment. The second is the possibility of supply interruption, in which case the country will have to spend more on supplies from alternative sources. But here too, things come down to money issues.

The most expensive crude oil raises pump prices and fuel bills. This squeezes household budgets and slows consumption as consumers become cautious about non-essential spending. For the government, higher oil prices mean less fiscal space for gifts or large social sector schemes needed to revive a fallen economy. A period of high pump prices before the elections in Delhi will not bode well for the BJP, which rules in the Center and is trying to return to power in the capital.

The rise in oil pushes inflation as government subsidies are exceeded and the cost of industry inputs increases. It also harms the financial and foreign exchange markets, as the increased demand for dollars to pay for oil imports puts pressure on the rupee and disrupts the current account deficit.

All these depress market sentiments and consumer appetite, which in turn suppresses consumption. A $ 10 increase in world crude oil prices reduces India's GDP by up to 30 basis points (100 bp = 1 percentage point).

On the supply side, India's vulnerability to outbreaks in the Middle East comes from its strong dependence on the region for its oil and gas supplies. International Energy Agency estimates that two thirds of the oil and half of the LNG (gas transported in ships) imported by India come from the strait between Iran and Oman . The narrow shipping route, 21 miles wide at its narrowest point, is the only way to move oil Persian Gulf To the open seas of the world. Any interruption in oil traffic will have a devastating effect on prices, as some analysts predict prices above $ 80. That will be a blow to the Indian economy in crisis.

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