The Narendra Modi government scrambled to soothe fears about another massive blow to an already faltering Indian economy after drone attacks on Saudi oil processing facilities knocked out 5 per cent of world crude production, sending global crude prices rocketing on Monday to their highest levels since 1991.

Quoting sources, Reuters said it might be months before Saudi Aramco would be able to bring oil production back to normal. Earlier, it had been thought that the world’s largest crude-processing plant would be fully operational in weeks.

Petroleum minister Dharmendra Pradhan said Aramco’s top executives had assured the Indian ambassador in Riyadh that they would ensure a “steady supply” of crude oil to India, presumably dipping into their existing inventories.

“We are confident that there will be no supply disruption to India. We are closely monitoring the evolving situation,” Pradhan added.

Oil prices surged almost 20 per cent on Monday. The benchmark Brent crude futures rose as much as 19.5 per cent to $71.95 per barrel, its biggest intra-day gain since the 1990-91 Gulf crisis. US West Texas intermediate futures climbed as much as 15.5 per cent to $63.34, the biggest intra-day percentage gain since June 1998.

Prices retreated slightly after President Donald Trump approved the use of the US emergency stockpile to deal with the crisis.

The domestic markets reacted with alarm to the latest development. The rupee tumbled 68 paise to 71.60 against the dollar while the 300-share BSE Sensex sank 261.68 points to 37,123.31.

The bigger worry was over the longer term impact that any supply disruption would have on the Indian economy, which imports 83 per cent of its crude oil needs.

Reserve Bank of India governor Shaktikanta Das led the chorus of pundits expressing deep concern over the fallout from the latest crisis. He claimed that a supply disruption could affect India’s capital account deficit and the fiscal deficit numbers.

“Depending on how long it persists, it will have some impact on the current account deficit and perhaps on the fiscal deficit if it lasts longer,” Das told a television channel on Monday.

“According to some estimates, it may take 2-3 months (to restore supplies). But I would like to wait for the official position from the Saudi authorities on how much time they are going to take to fill up this gap which has been created. It is difficult to say whether this will last longer. I think the picture will become clearer in the next few days,” added Das.

While the crude prices could spike another $5 to $10 in the coming days, some global oil traders and investment bankers including Goldman Sachs have forecast that prices could soar to $100 per barrel if the 5.7 million barrels of Saudi crude oil production per day stays offline for a long time.

A spike in crude prices and a weakening rupee would exacerbate inflationary pressures, raise the oil import bill and see the fiscal deficit maths careen out of control. This would mount pressure on the Modi government to get a grip on the economy, which saw growth plummet to a six-year low at 5 per cent in the first quarter (April-June).

“The impact will be severe if crude prices spike over the medium to long term. We will have to see how this plays out in the coming days and weeks before we can come out with specific numbers,” said N.R. Bhanumurthy of the National Institute of Public Finance and Policy.

Aditi Nayar, principal economist with ICRA, said: “If the current rise in crude oil prices is sustained, it is likely to result in a depreciation of the rupee to 72-73 against the US dollar over the next month. The impact of higher crude oil prices on inflation is likely to be modest, with a limited second-round impact in the current scenario of subdued demand. While the oil import bill would rise, the overall CAD is expected to remain modest as the outlook for non-oil imports seems muted. We expect the CAD to print at 1.9-2 per cent of GDP in the current fiscal.”

India’s current account deficit widened to 2.1 per cent of the GDP in 2018-19 from 1.8 per cent a year ago -– its highest level in the past five years.

Taimur Baig, chief economist at Singapore’s DBS Banking Group, said the Indian rupee would be one of the “immediate casualties” as it would be affected by any surge in the crude import bill. “Saudi Arabia is India’s second largest supplier of crude and cooking gas. A 10 per cent rise in crude prices widens India’s current account deficit by 0.4-0.5 per cent of the GDP,” Baig added.

“We assume at the macro level with imports of 1,643 million barrels of crude oil in FY20, a dollar increase in prices on a permanent basis would increase the (oil import) bill by roughly $1.6 billion per annum,” Madan Sabnavis, chief economist, Care Ratings said.

Wood Mackenzie research director Vima Jayabalan said Abqaiq and Khurais were the main processing centres for Saudi Arabia’s Arab Extra Light and Arab Light crude oil.

“China, South Korea, Japan and India are the biggest takers in Asia, with China and Japan leading the pack at an average of 900-1,100 kilo barrels per day each. India could be most exposed as its reserves are the least,” Jayabalan said.

The country has built a strategic petroleum reserve capacity of 5.3 million tonnes in the first phase. It is currently working on the second phase. In June, the government approved the construction of additional caverns to hold an additional 6.5 million tonnes of crude oil reserves. This reserve is big enough to meet the country’s crude oil requirement for 22 days.

NOT EVERYBODY IS WORRIED

Some analysts feel a severe energy shock to the world economy is unlikely, The New York Times reported

The upside

• As luck would have it, the attack came at a time when global oil stockpiles were higher than usual
• Several producing countries have ample spare capacity
• US oil facilities have so far been spared from a damaging hurricane season
• A slowing global economy has moderated energy demand
• If the damage is fixed quickly, the oil price rise could be limited to a modest $2 to $3 a barrel. A $10-a-barrel rise will still leave prices several dollars below where they were a year ago.

The downside

• The attack on one of the best oil companies is a big psychological blow. The theme is going to endure, said an analyst
• There are doubts the Saudis will be able to maintain their usual exports and satisfy domestic consumption
• Some are speculating that the crude price will touch $100 a barrel if the restoration effort drags on