GEOPOLITICS AND CRUDE - HOW IT WILL AFFECT ME AND YOU?
By Ruma Dubey
Yes, the rupee is falling at a pace faster than the pressure of gravity. Yes, the Food Security Bill is not good for the already frail health of the economy. Yes, tapering of QE will happen and FIIs will sell. Yes, we are set for some very tough times ahead. But sadly, there is some more not-so-good news.
The entire Middle East is simmering like a cauldron on a raging fire. The broth is nearing boiling point and there is rising fear that it could topple over, scalding one and all in its wake. And this could affect us also directly.
Two flash points in Middle East – Egypt and Syria. The tension in these two countries has spread to all over the Gulf, with some factions coming in, especially in support of Egypt. Qatar has broken away from the other Gulf states by supporting the Muslim Brotherhood in Egypt while the others – UAE, Saudi, Kuwait have shown support for General Abdul Fatah al-Sisi who removed President Mohamed Morsi and suspended the Egyptian constitution in a bloodless coup.
On the other hand, in Syria, where the situation is now getting pretty grim, the Gulf States support the rebels and supporters have sent an arms consignment weighing 400 tonnes to the Syrian rebels to oust Bashar Al Assad. Now Assad has the support of Iran and Russia has a blatant veto over any UN resolution against Assad. China also supports this veto for Assad. What is even more scary is that this ‘rebels’ group is not one homogenous mass of people – there are various rebels, some supported by Muslim Brotherhood, some by Al Qaeda which is stated to be most effective and many other factions. All these are rebels and there is infighting within the rebels too. So the Gulf states sending arms; one does not know which rebel group benefitted and USA does not want to send arms because it could end up arming the Al Qaeda. There is increasing pressure on USA to intervene and if that happens, things could get murkier.
The clashes in Syria are affecting all its neighbouring countries – Turkey, Lebanon, Libya, Israel and Jordan. Turkey was earlier an ally of Assad but since then has been supporting the rebels and it is facing a massive influx of refugees from Syria. Turkey has expressed fear about the possible use of chemical weapons against it by Syria, prompting the US to deploy patriot missile batteries along the Turkish-Syria border. The most affected is Lebanon where its Islamic militant group – Hezbollah, which is also a part of the Lebanese government supports Assad. Thousands of Hezbollah fighters have crossed into Syria to fight the rebels and the rebels in turn have fired rockets into parts of eastern Lebanon, Hezbollah mainfray. Israel is currently watching but its fear is advanced weaponry getting transferred from Syria to its arch enemy, Lebanon. Iraq as such is very stable but this fighting in Syria is turning more into a sectarian warfare within the country for Iraq – between its Shiaites supporting Assad and Sunnis supporting the rebels, with fears of Al-Qaeda linked Sunni militants gaining further strength in the country. Jordan is a Sunni country and supports the rebels – right now it is watching but the fear of uncertainty looms large. All these countries have massive pressure on their infrastructure due to the influx of Syrian refugees in huge numbers.
Thus as one can see, the entire region is currently undergoing turmoil. It is sitting on a tinderbox, one spark is all that is required and the entire region could feel the heat. So how will all this turmoil in Egypt and Syria affect me and you? Well, directly because of crude oil. Given the tensions, prices have hit a 18-month high as there is fear of supplies getting disrupted in case war breaks out. Syria itself is not a major oil producer but supply disruptions due to the entire region getting sucked into this is the major worry.
The price of crude was stable at US$100/barrel for some time now but over the past few days it has been hovering around $110 and today brent crude is at $117/barrel and Nymex at $111.69/barrel. This is double whammy for India which is as such dealing with a falling rupee. With over 70% of our oil needs being imported, as such there was a major gap due to the oil subsidy when rupee was at around Rs.50-55 and at that time, we were looking at oil price of $100/barrel. Today rupee is down at around Rs.66-67 levels and oil at over $111. So the entire math has changed further – if there was a gap earlier, it has only gone up further. Thus another round of fuel price hike – in diesel, which is currently losing around Rs.10/litre is desperately needed. A one-time price hike of Rs.5/litre is what the oil ministry wants and the FM also supports this to ease the pressure of fiscal and current account deficit. This price hike is inevitable and most likely it will happen after the current Parliament session ends and price hike could be to the tune of Rs.3/litre.
As we move ahead, the situation in Syria looks even more fragile and there is fear of USA getting involved. Yes, at this point of time clouds of war are looming large. This geopolitical tension needs to be watched closely. We no longer live in an isolated world, every happening in the world, affects me and you directly.