The impasse over India’s growing debt to Iran has taken a new turn. India has been unable to pay Iran for oil imports due to international sanctions on Iran, leading to an Iranian threat to cut off its supplies to India. The threat was so vaguely worded that it seemed like a bluff. Saudi Arabia has now called that bluff, offering to boost its oil production and send its oil to India to balance any Iranian cutoff. It’s consistent with Saudi Arabia’s history of attempting to stabilize world oil markets–and that’s how they’re justifying it. However, it’s also consistent with the Kingdom’s attempts to isolate and weaken Iran due to the growing threat it poses. It’s doubtful that the Iranian cutoff will actually go through, but this move by the Saudis weakens their hand in negotiations with the Indians. Iran may now be forced to accept payment in rupees–a currency it has little use for–or to continue allowing India to run up debt. Each would further weaken Iran’s economy, making it harder to develop fancy new toys for the military, pay wages to the bloated public sector, and keep the people quiet.
There’s an interesting detail to this. The Saudis offered to replace “some,” not all, of the 400,000 barrels Iran supplies to India. This gives credence to the rumor that the Saudis don’t really have significant excess oil production capacity, or at least not excess capacity that can be brought online on short notice. That excess capacity is the global oil economy’s insurance policy–it minimized the impact, for instance, of the loss of Libya’s significant oil production due to the revolution. If people begin to lose faith in the Saudi excess capacity idea, oil prices could see a small but permanent increase.
The Dhahran headquarters of Saudi Aramco, the Saudi state oil company. (Image via Wikipedia)
AFP is reporting that Iran’s state oil company, NIOC, is threatening to stopper its flows of crude oil to India if India doesn’t start paying its debts. India consumes heavily from Iran–it imports 400,000 barrels per day, or about an eighth of its oil. However, sanctions have made it harder and harder for India to transfer payments for that oil, meaning they’re now billions of dollars behind, which is making the cash-strapped Islamic Republic antsy.
This will be an extremely interesting story to follow, as it might give insights into broader questions about India’s role as an emerging power. Since the end of the Cold War, India has been inching closer to the United States. However, India is also a rapidly growing country that must find fuel for its economy–I don’t have the figures, but the three million barrels of oil being consumed by India today are only the beginning. Oil markets will tighten up in the future, meaning India needs to build “special relationships” with suppliers now, lest it be left in the cold in the future. Iran is an excellent candidate supplier, and India’s been courting Iran fairly heavily. They’re helping develop a major port (with all sorts of rumors of related security deals) in Sistan and Baluchestan’s city of Chahbahar, and there was even talk of building an Iran-Pakistan-India pipeline. However, oil is just one of India’s concerns, and that relationship with the US is important as India tries to ensure it doesn’t become, as it were, the Mexico to China’s United States. Iran’s threat, as you can see in the article I linked to, is ambiguous–the spokesman warned India of potential shutdown and then said there were no plans to actually shut down. However, Iran certainly would like those two billion dollars back. If India can’t find a legal way to get that money to Iran–and Iran refuses to take rupees–then India may be forced to choose between violating sanctions and violating its contracts with Iran. The direction it chooses, should such a scenario arise, will show us how the Singh government balances its fundamental interests.