US President Donald Trump has made a shocking announcement. He says that every super tanker i.e. oil ship passing through the Strait of Hormuz will now have to pay 20% guardian fee (toll tax) in the name of American security. The captains of the shipping industry are openly calling it highway robbery. Trump’s guardian fee is approximately Rs 258 crore. Meanwhile, Iran was also voluntarily collecting toll of about 2 million dollars (about Rs 17.2 crore) from some ships passing through this route. That means a tanker may have to pay a total of Rs 275 crore as toll. The common man of India may have to suffer the biggest and direct consequences of this tussle between America and Iran. Let us know if Trump’s decision is implemented then what effect it will have on the prices of petrol and diesel along with crude oil in India.
Before understanding this entire controversy and its impact, let us know what Super Tankers (VLCC – Very Large Crude Carrier) are.
- These ships are so huge that about 2 million barrels of crude oil can be filled in them at one time.
- There are 159 liters in a barrel, which means a super tanker contains about 318 million liters of oil.
In today’s time, when the price of crude oil is around $80 per barrel, the total cost of oil loaded in an entire ship is around $160 million.
Trump’s 20% tax vs Iran’s custom toll
Till now, Iran was voluntarily collecting toll of about 2 million dollars from some ships passing through this route. But Trump’s new order completely changes this math. Trump has asked for reimbursement of 20% of the value of the entire cargo. A 20% tax on oil worth $160 million means a direct toll of $30 million (about Rs 258 crore) on the ship. However, the method of implementing the toll has not been clarified by Trump yet. Still, we look at the possible outcomes through an estimate. If we look at it per barrel..
- Iran’s tax: Due to the imposition of 2 million dollars (about Rs 17.2 crore) on the ship, there is an additional burden of only 1 dollar per barrel.
- Trump’s tax: Due to the imposition of 30 million dollars (about Rs 258 crore) on the ship, a huge burden of Rs 15 per barrel is directly added.
What will be the impact on Indian petrol pumps?
The math becomes even scarier for India at the current value of the dollar (based on $1 being worth Rs 96.19):
1. Impact of Trump’s tax
If Trump’s order is implemented, there will be an additional burden of $ 15 per barrel.
In rupees: $15 × ₹96.19 = ₹1442.85 increase per barrel.
There are 159 liters in a barrel. That means impact on 1 liter crude oil: 1442.85 ÷ 159 = approximately ₹ 9.07 per liter. (That is, by the time it reaches India, the cost of petrol and diesel will directly increase by more than Rs 9 per liter!)
2. Impact of Iran’s tax
If Iran’s rule of 1 dollar per barrel remains in force.
In rupees: $1 × ₹96.19 = ₹96.19 increase per barrel.
Impact on 1 liter of crude oil: 96.19 ÷ 159 = approximately ₹0.60 (60 paise) per litre. (Indian oil companies can easily bear this burden of 60 paise, which will not affect the public.)
India imports 80% oil
India imports more than 80% of its oil needs and a large part of it comes from Saudi Arabia, Iraq and UAE via this Strait of Hormuz. If there is a direct jump of Rs 9 per liter in the cost of crude oil, its impact will not be limited to just the fuel tank of your vehicle. Due to diesel becoming expensive, freight charges will start skyrocketing. Vegetables, milk, grains and everything of daily use coming from farms to markets will become expensive. This decision may bring inflation in India.
What will happen next now?
Iran’s Foreign Minister Abbas Aragchi has described Trump’s 20% tax as excessive and said that whoever provides security should get appropriate compensation, but we will be fair. However, Trump’s announcement of charging guardian fees has created panic in the global oil market and shipping companies. However, India has maintained diversity in its oil purchases. Record quantity of crude oil is being purchased from Russia, while imports from America and African countries have also been increased.
Apart from this, India has created Strategic Petroleum Reserves to deal with any emergency and has also entered into long-term oil supply agreements with many countries. Despite this, Gulf countries like Saudi Arabia, Iraq, UAE, Kuwait and Qatar are still important for India’s energy security, because a large part of India’s total crude oil imports still come from this region.
Disclaimer: These figures of increase in prices have been given on the basis of current price of crude oil and general calculations. Actual price may vary depending on government tax policy, oil companies’ pricing, shipping costs and international market conditions.
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