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Siddharth Gupta (EMU4180838)

Scenario Statement: Following Strict Embargo on Iranian oil, crude oil prices rise to $ 90
per barrel

Short description of the situation:

America has put Economic sanctions on Iran. The America will not trade with Iran, indirectly
will not trade with any country that trades with Iran. This embargo on IRAN has put Iran’s 5
million barrels per day out of the oil market. Owing to shortage of crude oil supply, the per
barrel price has shot up to 90$ per barrel.

Country Supply Country Consumption


mbbl\day mbbl\day
Russia 11 USA 20
USA 11 China 13.2
Saudi Arabia 10.1 India 4.7
Iran 4.5 Japan 4
Iraq 4.3 Saudi Arabia 4
Canada 4.2 Russia 3.2
China 3.8 Iran 2

Reasons for the situation to arise:

In 2015 Iran signed a nuclear deal with permanent members of UN Security Council plus
Germany. This framework of the deal required Iran to limit its uranium use for peaceful
purposes only. This deal also gave power to the P5+1 member to check and control Iran’s
nuclear program\ nuclear use. On the bargain all economic sanctions were lifted from Iran.
This deal was made for 10 years. Thus pushing Iran’s nuclear program back by 10 yrs.

In the year 2015 to 2017 Iran test fired several missiles ranging from 1500-2000Km. These
tests did not go well with the deal. Trump government felt the deal is not a permanent
solution. They called the deal off, thus putting sanctions back on Iran. Iran oil out of the
market, coupled with collapse in Venezuelan production and deal between OPEC and Russia
to curb their output has led to jump in oil price which has now touched 90$ per barrel.

Socio-politico-economic impact it would have on different sectors, geographical,


industrial, occupational and like

India has signed various deals with Iran including Chabahar port. The planned North South
corridor connecting Russia and India is also planned to pass through Iran. India imports
about 10% of its oil from Iran. India feels the nuclear deal was good for it, as it allowed Iran
to trade with India. The sanctions on Iran means India won’t be able to trade with Iran.
These geopolitical games puts India on high alert, as India donot want to spoil its relations
with USA. Recently US has postponed its 2+2 dialogue with India.
The higher oil price will lead to increase in fiscal defecit, as India imports majority of its oil
consumption. India might have to depend more on Saudi Arabia for its oil needs. The Kuwait
oil is also an option. India has to look at the economic value it gets from the alternatives.
Iran has supplied oil at discounted price to India. It has also waved off the shipping cost.

India Import mbbl\day

Saudi Arabia 0.8


Iraq 0.65
Iran 0.44
Nigeria 0.43
UAE 0.37
Venezuela 0.33

The lower oil prices had played a big role to make India world’s fastest growing economy in
recent years. Every 10% increasing the price of a barrel knocks 0.2% to 0.3% off India’s
growth rate.

The OPEC producers can step in to overcome the shortfall by increasing the production.
This market opportunity to increase market share is a huge opportunity for countries like
Saudi Arabia. The increase in oil price will also benefit Russia, Canada, US. A 90 $ a barrel
makes US fracking oil, Russia’s north pole expedition and Canada’s sand oil more
economical. These countries will pump in more barrels at increased price and take leverage.

Russia has openly supported Iran. Russia is going to continue its trade with Iran. Turkey has
also openly stated to continue its oil import from Iran. China the largest importer of Iranian
oil has also supported Iran.

Iran Export (mbbl\day)

China 0.65
India 0.50
Korea 0.30
Turkey 0.17
Italy 0.14
Japan 0.13

Energy industry is a dollar governed industry. All financial transactions are in dollars. It will
be very difficult for countries to clear dollar transaction with Iran. The banks in Iran are hit
very hard with penalties by US government. This will give impetus to trade oil in other
currencies. China is also putting its weight on payment in Yuan (China’s currency).

These sanctions can also initiate a civil protest against the Iran government. The
government could find difficult to survive and make economic growth. The rising inflation
and unemployment is bringing Iranian people on roads. The country can go the Venezuelan
way.

Impact on your business

Larsen and Toubro is a ECP player. Major revenue comes from its construction arm.Larsen
and Toubro has projects to construct platforms, Power Plants, Metros, Steel Plants etc. The
raw material cost and fuel cost amounts to about 20% of its total expenses. The Rising price
of oil has strengthened the dollar. The other currencies including Rupee has weekend. The
depreciating Rupee has increased the import cost of raw material by the company.

The increased transportation cost caused due to increase in fuel cost has inflated the fuel
expenses in company’s PnL statements. The inflated expenses have reduced the EBIT
margin.

LnT has projects in Oman and UAE, to build substations. These projects in power
transmission and distribution business valuing about 175$ will be directly impacted with
rise in oil price.

LnT is being cautious, as the growth plans they made were keeping oil price in range 60-65$.
At this price both buyer and seller were comfortable. Company is ready to bid for lower
margins as there is lot of competition. Though the investment will be cautious but more
focus will be on being more efficient, more productive and bringing out more value.