Oil Shock from Iran War Jolts Global Markets, Puts India on Alert Over Energy Security

The intensifying war involving Iran has triggered a sharp upheaval in global energy markets, pushing crude oil prices dramatically higher and raising concerns about supply disruptions, inflation, and economic instability across the world.

For India, which depends heavily on imported oil, the surge in prices and disruption of key maritime routes pose significant economic and strategic challenges.

Sharp Spike in Crude Oil Prices

As the conflict escalated, international crude oil prices surged nearly 30 per cent early on Monday, briefly touching close to $120 per barrel, a level last witnessed in 2022.

Although prices later moderated somewhat, they remained elevated above $100 per barrel amid continuing uncertainty.

By around 12:30 pm IST, Brent crude was still trading roughly 16 per cent higher at about $108 per barrel.

Market sentiment improved slightly after reports emerged that the Group of Seven (G7) nations were planning discussions on a coordinated release of oil from their strategic petroleum reserves in order to stabilise supply and cool the rapid rise in prices.

War Intensifies Supply Fears

The current hostilities, which began on February 28, show no immediate signs of resolution. The prolonged nature of the conflict has sparked fears of extended disruptions to global energy supply chains.

A major factor behind the supply anxiety is the near shutdown of tanker traffic through the Strait of Hormuz, one of the world’s most crucial maritime oil routes.

Iran has warned commercial vessels against crossing the narrow passage and has reportedly targeted several ships attempting to transit the waters.

The heightened security risks have led insurers, shipping companies and trading houses to avoid the route, effectively paralysing oil shipments through the channel.

Leadership Change in Iran Adds to Uncertainty

Oil markets have also been unsettled by the political developments in Tehran following the appointment of Mojtaba Khamenei, son of the late Ayatollah Ali Khamenei, as Iran’s new Supreme Leader.

His elevation is being interpreted as a continuation of the existing political order in Iran. This development carries geopolitical implications because the United States and Israel had reportedly hoped that the conflict could trigger regime change in Iran.

Global Markets React Nervously

The surge in energy prices immediately reverberated through financial markets across Asia.

Stock markets in the region witnessed sharp declines as investors reacted to the possibility of higher global inflation and tighter monetary policies.

In India, the benchmark indices Sensex and Nifty slipped nearly 3 per cent in early Monday trading, reflecting investor anxiety over rising oil costs and geopolitical instability.

At the same time, the Indian rupee weakened to a fresh low against the US dollar, further compounding economic concerns.

India’s Vulnerability to Oil Price Swings

India remains particularly sensitive to fluctuations in crude prices because more than 88 per cent of the country’s crude oil requirements are met through imports.

Higher crude prices can have multiple ripple effects on the Indian economy. These include:

• Widening of the current account deficit
• Pressure on foreign exchange reserves
• Depreciation of the rupee
• Increase in inflation levels

Despite these risks, the immediate focus of policymakers is on ensuring that fuel supplies remain uninterrupted.

Strait of Hormuz: The World’s Energy Lifeline

The Strait of Hormuz, located between Iran and Oman, connects the Persian Gulf with the Gulf of Oman and the Arabian Sea. This narrow passage is widely regarded as the most vital oil transit chokepoint on the planet.

Approximately one-fifth of the world’s liquid petroleum consumption and a major portion of global LNG trade pass through this strategic corridor.

Nearly 15 million barrels of crude oil move through the strait every day.

Although some Gulf countries have pipelines that bypass this route, their combined capacity is limited.

Even if these pipelines operate at full capacity, around 9 million barrels per day — roughly 9 per cent of global demand — would remain vulnerable if the strait remains closed, according to industry specialists.

India’s Dependence on the Hormuz Route

India imports a significant portion of its oil through the Strait of Hormuz.

In recent months, about 2.5 to 2.7 million barrels per day of India’s crude imports, accounting for nearly half of the country’s total oil purchases, have passed through this route. Over a longer period, the share averages around 40 per cent.

Most of this oil originates from major Gulf suppliers, including:

• Iraq
• Saudi Arabia
• United Arab Emirates
• Kuwait

Production Cuts in Gulf Nations

Because tankers are unable to leave the Persian Gulf due to the blockage at Hormuz, crude oil inventories are accumulating rapidly in the region.

With storage facilities nearing capacity, some oil-producing countries have begun reducing output.

Reports indicate that Iraq and Kuwait have already curtailed production, while Saudi Arabia and the United Arab Emirates may soon follow if the crisis continues.

Additionally, attacks targeting energy facilities across the region have intensified fears of further supply disruptions.

Impact on India’s Oil Import Bill

India consumes massive quantities of crude oil, importing roughly 1.8 to 2 billion barrels annually.

Economists estimate that every one-dollar increase in crude oil prices raises India’s annual oil import bill by approximately $2 billion.

A report by global financial firm Nomura identifies India, Thailand, and South Korea as the three Asian economies most exposed to rising oil prices in terms of import costs and current account pressures.

The report also states that a 10 per cent increase in oil prices generally expands India’s current account deficit by around 0.4 per cent of GDP.

Fuel Prices in India Likely to Remain Stable for Now

Despite the spike in international oil prices, the government currently has no immediate plans to raise petrol and diesel prices.

For several years, India has followed a strategy of keeping retail fuel prices relatively stable, even when global oil prices fluctuate sharply.

Public sector oil marketing companies absorb temporary losses during price spikes and recover them when prices decline.

As a result, petrol and diesel prices have largely remained unchanged since April 2022.

Maintaining stable retail prices helps limit the inflationary impact of volatile crude oil markets.

Government Monitoring Economic Impact

In its monthly economic review released recently, the Ministry of Finance warned that sustained crude prices above $100 per barrel could place pressure on key economic indicators.

Apart from crude oil, the government is also closely monitoring the availability and prices of natural gas and liquefied petroleum gas (LPG).

The ministry noted that the geopolitical tensions surrounding the Strait of Hormuz could lead to higher imported inflation by increasing fuel costs and weakening the rupee.

However, it added that because India’s inflation rate is currently near the lower end of the target band, the immediate impact may remain manageable.

India Diversifying Oil Supplies

To mitigate the risk posed by the Hormuz disruption, Indian refiners are actively increasing purchases from regions outside the Gulf.

These alternative sources already account for around 60 per cent of India’s crude imports.

Oil shipments from countries such as Russia and other suppliers are currently en route to Indian ports, helping replenish stocks.

Adequate Fuel Reserves for the Near Term

Government officials have indicated that India presently holds six to eight weeks of crude oil and petroleum product reserves.

These reserves are expected to be continuously replenished through imports from alternative supply routes.

As refineries keep processing crude and receiving fresh shipments, the available stock coverage is expected to remain stable.

Emergency Measures to Secure LPG Supplies.

To guarantee an uninterrupted supply of cooking gas to millions of households, the government has invoked emergency provisions under the Essential Commodities Act.

Under these powers, domestic refineries have been instructed to:

• Increase LPG production to the maximum possible level
• Ensure that all LPG output is directed toward household consumption
• Suspend the use of LPG for petrochemical manufacturing

This step is particularly crucial because more than 80 per cent of India’s LPG imports normally pass through the Strait of Hormuz.

Natural Gas Allocation Being Adjusted

Anticipating tighter supplies of liquefied natural gas, the government has already begun reducing gas allocations to certain industrial sectors.

More than half of India’s LNG imports also travel through the Hormuz route, making them vulnerable to disruption.

Officials indicated that if the situation deteriorates further, the government may rearrange gas distribution priorities to ensure essential sectors remain supplied.

Priority Sectors for Domestic Gas

India follows a structured allocation policy for domestic natural gas supplies, prioritising sectors such as:

• City gas distribution networks
• Fertiliser manufacturing
• Electricity generation

If shortages arise, industries with the flexibility to shift to alternative fuels may be asked to do so in order to safeguard supplies for critical sectors.

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