US-Iran Peace Deal Could Save India Billions On Oil Import Bill

The US-Iran peace deal to be signed in Switzerland could end a 107-day war that has killed over 10,000 people and triggered a global energy crisis. Iran alone has suffered $145 billion in damages.

Details are scarce but it is expected to include the US easing naval restrictions against Iranian ports and Iran allowing normal shipping operations through the Strait of Hormuz, through which 20 per cent of the world's oil supply normally passes.

The re-opening of the Hormuz is the obvious economic highlight, though it will likely take weeks, if not months, for Gulf oil fields, refineries, and depots to repair damaged infrastructure, clear backlogs, and resume normal production.

Normalised oil flows will also depend on whether shipping and insurance firms trust the US and Iran to stop fighting and drag the global energy trade into their war. It will also depend on de-mining the Hormuz.

That said, benchmark Brent crude dropped $4.16 on news of the deal to settle at a three-month low of $83.17 a barrel. WTI, or West Texas Intermediate, dropped $4.13 to settle at $80.75.

India's $15 billion energy 'win'

For India the agreement - if the two sides honour their commitments - is a big win.

It offers relief against an energy crisis threatening the fragile finances of over 400 million middle-class families, while cheaper crude means a reduced import bill that could shrink current account deficit by $15 billion and ease pressure on the rupee.

Before the war India shipped over 40 per cent of its oil and between 70 and 90 per cent of its gas needs via the Hormuz, an over-dependence only partly corrected by diversification but which remains, at least in the short- and medium-term, a cause for concern if the war should re-start. Sustainable long-term US-Iran peace is, therefore, essential for India's energy needs.

A stable Middle East is just as critical given India also imports oil and gas from the UAE, Iraq, and Saudi Arabia. All three have been targeted by Iranian missile and drone strikes, causing damage to their respective energy export architecture.

Overall, regional stability plus Iran allowing normal Hormuz shipping operations should mean lower oil prices, though delayed re-opening of the narrow passage - even for non-military reasons - could keep them up.

How much the import bill will drop and benefit the consumer is uncertain, particularly since OMCs face sizeable cost-revenue gaps despite petrol and diesel prices rising by Rs 7.4 and Rs 7.58 per litre since fighting began.

These gaps have only been partially offset by government subsidies and reductions in central taxes.

On the actual purchase of Iranian crude, Reuters and Iran's Mehr News Agency indicated in separate reports last week that the US had agreed to lift sanctions against Iranian oil and petrochemical products as part of the peace deal.

Energy sales are roughly 60 per cent of Iran's total revenue, with the potential for greater income once sanctions are lifted.

This should be good news for India; Delhi bought 300,000 barrels of oil per day from Tehran before the sanctions, and has already made its first purchase of oil since. In April refineries bought 44,000 metric tons after the US suspended sanctions.

An Iran now free to export its energy will be a sought-after energy partner for many countries, especially those in South East Asia that have seen supply squeezed because of the war and which may have deeper pockets for Iranian crude oil.

That oil will likely now be priced at a premium, particularly since flagship grades like Iranian Light offer the right mix of density and sulfur content to maximise production of high-value fuels without needing expensive, complex processing equipment.

And it isn't just India-Iran's energy trade that could see a boost.

Pre-sanctions, the total bilateral trade between the countries was over $17.5 billion.

The majority of this -  roughly 90 per cent - was oil bought by India, but renewed trade ties could see its exports rise significantly from around $3.38 billion, particularly with post-war reconstruction on the agenda.

So the macro takeaways include easing inflationary pressure, a reduced CAD, and breathing room for federal finances.

Chabahar, INSTC revived

Just as significant is the expected freedom to continue developing the Chabahar Port and the International North-South Transport Corridor, or INSTC, linking Indian ports to Russia and Central Asia, and completely bypassing Pakistan.

The $500 million project is 70 per cent complete; sanctions relief could mean it becomes operational by 2027. The INSTC, meanwhile, could cut shipping time from India to Russia by 40 per cent and reduce costs by up to $1,000 per container.

All of this is excellent news for India.

As a bonus, any deal also removes diplomatic uncertainty because the war necessitated Delhi balancing economic and civilisational ties with Iran and a critical defence and strategic relationship with the US.

But there is plenty to be cautious about too.

The Israel problem

Israel, for one thing, has made it clear it is unhappy about ending the war before achieving its stated target - i.e., the complete dismantling of Iran's nuclear and missile programme.

Donald Trump and his Israeli counterpart, Benjamin Netanyahu, have reportedly already had a verbal throwdown on this issue, including a squabble over military strikes against the Hezbollah in Lebanon, the most powerful of Iran's proxy groups.

Israel Defence Minister Israel Katz said his country's forces will remain in occupied parts of Lebanon indefinitely, or at least till 'all terrorist infrastructure is destroyed', thereby threatening to derail the entire regional peace process.

Israel's Benjamin Netanyahu could derail US-Iran peace deal. Photo- PTI

For India, this is a bit of a quandary since Israel is a valued trade and defence partner, with Netanyahu and Prime Minister Narendra Modi seen as sharing a close friendship.

All of this, of course, relies entirely on long-term peace between the US and Iran, and in the wider Middle East region.

But given itchy trigger fingers on one side (and with Israel clearly unhappy at being told to stand down), a sudden flare-up or resumption of fighting - particularly if Netanyahu continues to target the Hezbollah - can't be fully ruled out.

Multi-polar Middle East challenge

It means, therefore, that India must learn to navigate a new multi-polar Middle East rather than one dominated by Israel and the US with the latter as the mediator. In this changed reality, India must not only balance the US, Iran, and Israel, but also Saudi Arabia, the UAE, and other Gulf states, all of whom are critical energy trade partners for the Indian economy.