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Saudi Drone attack impact on Indian Economy

India, The World’s Third-Largest Oil Importer, Has A Reason To Worry As Escalating Geopolitical Tensions In West Asia Have Raised The Spectre Of Higher Oil Prices.

On Sept. 14, 10 Drones Targeted Saudi Arabia’s Abqaiq Oil Refinery And Khurais Oil Field, Belonging To The State-Owned Aramco. At The Sites, Which Account For Over 5% Of Global Oil Supply, The Attacks Sparked Massive Fires That Were Visible From Outer Space. While The US Has Blamed Iran, Yemen’s Houthi Rebels, Too, Have Claimed Responsibility.

Saudi Arabia Is The Second-Largest Supplier Of Crude Oil And Cooking Gas To India.

In The Aftermath Of The Attacks, Analysts Have Forecast An Increase In Global Oil Prices Of Between 10% And 15%, Even Though Immediate Supply-Side Disruptions May Be Averted.

Utilization Of The Spare Capacity

In Response To The Attack; Saudi Arabia And The US Are Ready To Utilise Their Strategic Petroleum Reserves To Address The Potential Shortage Of Supply. Saudi Aramco, The National Oil Company, Has 35-40 Days Of Supply To Meet Contractual Obligations.

Saudi Arabia Holds Oil In Tanks Within The Kingdom Itself, And Has Created 3 Strategic Locations Around The World: Rotterdam In The Netherlands, Okinawa In Japan, And Sidi Kerir On The Mediterranean Coast Of Egypt.

OPEC Has Spare Capacity Of 3.21 Mb/D According To The IEA. Saudi Arabia Has ~2.27 Mb/D Of That Capacity. The Balance Of 940,000 Bpd Of Spare Capacity Is Held Mainly By Kuwait And The United Arab Emirates. Iraq And Angola Also Have Some Spare Capacity.

The Drone Attacks On Aramco Could Potentially Also Eliminate The World Spare Capacity If Production Is Not Restored At The Earliest.

Effect On The Indian Market

  • Higher import bills can potentially exacerbate the recent slowdown in the Indian economy.
  • After Iraq, Saudi Arabia is the 2nd largest supplier of crude oil to India and had supplied 295.6 million barrels (16%-17% of the total oil imports) during FY19
  • India imports 80 per cent of the oil it consumes, which means there are multiple ways in which the country will be impacted by this disruption.
  • For now Saudi Arabia has assured India that there would be no loss of supply though a delayed restoration of the damaged facilities may however trigger a search for alternative supplies.
  • Indian refiners do not see an immediate disruption, but prices may witness a short-term hike.
  • India is already trying to restore the loss supply of crude oil from Iran which has led to a decline in crude processing of refiners by 2.3% and increase in the import of petrol and diesel by 298% and 363.5% respectively.
  • The increase in global oil prices will also affect India’s oil import bill and its trade deficit.

Effect Of Price Rise On The Indian Economy

  • Any sustained increase in oil prices is always going to be a cause of concern for India considering we import more than 80% of our oil requirements. In the current financial year India has imported 4.5 mb/d (April-July) of crude oil and our import dependency based on consumption has increased to 84.9%.
  • Crude oil and its products have a weight of 10.4% in the WPI. Of this crude oil and natural gas have a weight of 2.4% and mineral oils around 8%. With the exception of LPG and kerosene (with combined weight of 0.83%), the rest would be driven by market forces. Therefore, any increase in the price of crude oil would tend to impact the WPI inflation number commensurately. In terms of the CPI, fuel related items have a weight of nearly 2.7-2.8% directly. Increase in the crude oil prices will impact the WPI more than the CPI.
  • India had been facing a relief in fuel prices due to the global fall in fuel prices. Now in India prices change every fortnight based on the changes in the price of crude oil and changes in tax rate. We can maybe foresee an increase in petrol and diesel in the coming few days, depending on how the oil markets react in the reduction in supply.



As Such, Rising Oil Prices Will Worsen The Indian Government’s Fiscal Balance. Moreover, Higher Crude Oil Prices Would Also Lead To Higher Domestic Oil Prices, Which, In Turn, Will Further Depress The Demand For All Things, Especially Those That Use Oil As The Primary Input  Say, Cars. This Dip In Consumption Demand, Which Is Already Under Strain As The Recent Growth Slowdown Has Shown, Would Likely Mean Lower Economic Activity And Consequently Lower Revenues For The Government.

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