New Delhi: In a significant development, the Trump administration has decided to end the waiver on Russian crude oil sanctions. The decision is likely to create a major energy crisis in India. It is important to note that for the past several months, India had been benefiting from this US waiver, purchasing discounted Russian oil and staying insulated from global oil shocks. But after this decision, India’s entire energy equation will change.
Iran war disrupts the Strait of Hormuz
Due to the Iran conflict, the Strait of Hormuz, the world’s most critical oil chokepoint, is already being disrupted. Tanker movement has slowed, insurance costs have increased, and global crude oil prices have surged from around USD 72 per barrel before the war to over USD 105 per barrel.
India is now in the middle of a double crisis. On one hand, oil supply from the Middle East is unstable; on the other, the threat of renewed restrictions on Russian oil is looming. This comes at a time when fuel prices in India were increased by around ₹3 just a few days ago.
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India and its dependence on Russian crude oil:
- Discounted Russian crude oil has acted as a major shield against inflation for India for nearly the past two years.
- When Western countries boycotted Moscow due to the war against Ukraine, India rapidly increased its purchases of Russian oil.
- The economics behind this shift were highly attractive.
- Russian oil was cheaper, shipping routes were convenient, and refineries were making strong profits.
- Russia became India’s largest crude oil supplier gradually. But then the Iran war broke out.
- Rising tensions around the Persian Gulf and the Strait of Hormuz have tightened global oil supply.
- There are fears that supplies from Saudi Arabia, Iraq, Kuwait, and the UAE could be disrupted.
- In response to this crisis, the US had temporarily relaxed enforcement of sanctions.
- This waiver allowed India and countries like Indonesia to purchase already-loaded Russian oil shipments without facing immediate penalties.
- India had also been pushing strongly for an extension of this waiver.
- Washington initially agreed, citing global energy stability, but political pressure within the US kept increasing.
- American lawmakers and European allies argued that the waiver was effectively boosting Moscow’s revenues, while the West was trying to economically isolate Russia over the Ukraine war.
- On Sunday, this waiver expired, suddenly changing the risk calculations for Indian refiners.
Rising inflation risk
It is important to note that India’s biggest challenge is its heavy dependence on imports. New Delhi imports more than 85 percent of its crude oil requirements. Any sustained rise in oil prices directly impacts inflation, the government’s fiscal balance, household budgets, and overall economic growth.
During the waiver period, India had become highly dependent on Russian crude oil. According to Kpler data, India’s oil imports from Russia reached a record 2.3 million barrels per day in May. In some months, nearly half of India’s total oil imports came from Russian crude alone.
The reason was clear: Russian oil had been shielding India from the surge in global prices. But without this waiver, the future outlook is far more painful.
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