Iran Oil Issue – A Threat To World Market ?

The black gold is all red! It has skyrocketed and zoomed past 123$ per barrel. A resource which is the fuel for global development is all set to ablaze the world. Iran, the third world oil exporter and a strategic country from where crude oil is exported worldwide, has been in news for Nuclear Enrichment Program.

European Union has issued a trade embargo on Iran. US is insisting to cut Iran from International Financial system. United Nation too has set the buzzer in response to USA. It is said that more than 85% of crude oil is exported to Asian markets, with India (16%), Japan, South Korea and China (20%) the main destinations.

The crude oil which is at a 10 month high is said to further escalate to new heights. The developing countries have increased their export and it is estimated that OPEC is in a water tight situation for not being able to increase oil production. The closure of Strait of Hormuz, a vital oil transit point, is expected to create a gap of nearly 1.6 million barrel per day. This is gross for the world oil consumption. The demand will outstrip the production and create a spiraling effect on crude prices and in no time we can see levels as high as 150$-170$ per barrel.

The increase in Oil prices has a serious repercussion on India. Not only the trade deficit shall increase but also the fiscal deficit shall inflate. Rise in oil price will ultimately be passed on to the consumers and this may increase the prices of essential as well as non essential commodities. Subsequently, inflation shall be on an upswing.

This is a guest post by Mr. Mitesh Agarwal, BBA & MBA (Finance). Currently working as Financial Analyst with a leading firm in Mumbai.

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