Washington's demand for countries to cut all Iranian oil imports is going to be a massive headache for India.
As the world's third-largest oil importer and the second-largest buyer of Iranian crude after China, complying with the U.S. sanctions — enacted following President Donald Trump's withdrawal from the 2015 Iranian nuclear deal — will require India to find new sources of crude at a higher cost.
At a time of rising oil prices globally and a weakening national currency amid an emerging markets sell-off, this is going to hurt.
Washington may grant waivers for major importers of Iranian crude but still expects them to ultimately comply with sanctions, top U.S. officials said. Discussions on the issue, as well as on security issues and trade more generally, took place Thursday as the U.S. Secretaries of Defense and State, James Mattis and Mike Pompeo, met with their Indian counterparts in Delhi.
"We will consider waivers where appropriate but that it is our expectation that the purchases of Iranian crude oil will go to zero from every country or sanctions will be imposed. So we'll work with the Indians, we committed that we will do that," Pompeo told press at the summit.
India imports 70 percent of its energy needs, and fuel costs are hitting multi-year highs in the rapidly growing country of 1.3 billion people. And the rupee fell to a record low against the dollar this week as rising global interest rates and trade war fears rock emerging market currencies across the board. This, combined with the elimination of a major source of cheap crude, could have significant impacts on India's inflation and economic growth.
"We want to make the point that India is heavily reliant on oil imports for its consumption needs and 83 percent of its oil comes from external sources," one Indian official was quoted as saying in local Indian newspaper The Economic Times. Other senior officials have said outright that the country will not fully cut their Iranian imports and that doing so would be impossible.
In an attempt to cling onto its trading partners, Iran is providing significantly cheaper oil than any of its competitors, as well as offering extended credit terms and practically free shipping. Its proximity to India also helps reduce transport costs.
What's more, many Indian refiners are configured to process Iranian oil — this means they can't switch to other suppliers easily.
The U.S. State Department set a deadline of November 4, and although it's suggested the possibility of temporary waivers, still intends to impose secondary sanctions countries that do not comply.
Delhi will therefore be forced to turn to other producers to meet their energy needs. Washington has offered to replace the loss of supply with U.S. oil, but those shipments will be more expensive than those from nearby Iran.
"My personal opinion is that it will be very difficult for India and other buyers of Iranian crude to halt all imports," said Stephen Brennock, oil analyst at PVM Oil Associates in London. "That said, if recent evidence is anything to go by, shipments will have fallen significantly by the time we reach the November 4 deadline."
Indeed, India's August oil imports from Iran were down 32 percent on the prior month to 523,000 barrels per day (bpd), according to primary tanker arrival data. Still, that was 56 percent higher than the same month last year, due largely to the dramatic discounts offered by Tehran since the sanctions were announced.
Other likely options to replace Iran's oil include Saudi Arabia and Iraq. As for the U.S., Energy Information Administration (EIA) data reveal that U.S. crude exports to India reached a record high of 413,000 bpd in June. "It is fair to say that this blossoming love affair will strengthen as U.S. sanctions on Iran take effect," Brennock said.
While some analysts see the changes having a major impact on India's economy, Brennock believes they will be manageable.
"Indian refiners will face slightly higher input costs given that their access to attractively-priced Iranian crude will be limited. Even so, I don't see this having a major impact on its broader economy," he said.
Still, any palpable rise in energy costs for India's burgeoning population will be problematic for the government — especially as it seeks to appease an increasingly frustrated consumer base ahead of general elections next year.