War on Iran: The New Oil Shock

AT ITS SHORTEST,  the Strait of Hormuz spans a mere 39 kilome­tres between Iran and the northernmost edge of Oman’s Musandam Governorate, a tiny sliver of territory jutting out from the United Arab Emirates (UAE). This vital sea lane that separates the Persian Gulf and the Gulf of Oman sees the passage of 20 per cent of global oil and gas sup­plies. Currently, all shipping through it has been choked by Iran and the reverberations of that step are rocking the world’s energy markets.

In such situations, there are two risks to these mar­kets. The first one is rapid increase in energy prices and the second one, the complete disruption of supplies due to war. In the last 48 hours, these risks have changed dynami­cally with the second risk now far outweighing the first one. Qatar, the largest producer of Liquified Natural Gas (LNG), has shut down its facilities. This has happened in tandem with Iraq and Saudi Arabia closing production at their large oil-producing facilities.

Iran’s attacks on these hydrocarbon-producing facili­ties along with its “closing” of the Strait of Hormuz has led to Iraq, Qatar and Saudi Arabia erring on the side of caution to prevent even more damage to their infrastructure. Shipping traffic through the strait is now down 92 per cent com­pared to the last week of Febru­ary. Such massive reduction in oil and gas flows is bound to hit the global economy—already reeling from US President Donald Trump’s erratic trade tariffs—very adversely.

In the last two days, most Asian markets have respond­ed negatively to the situation in West Asia: South Korean and Thai markets have tanked due to concerns over their low stocks of oil and gas. No country is immune from these disruptions now.

Since last week, when the conflict between the US-Israel and Iran began, global oil prices have only marched up. On March 5, the price of a barrel of Brent crude, the global benchmark, touched $82/barrel. This is up by almost $10 since the end of February. India’s crude import basket comprises “sour” grades and “sweet” grades of oil, roughly in the 79:21 ratio. This has been priced at $80.16 per barrel in March by the Petroleum Planning and Analysis Cell (PPAC) of the Union Ministry of Petroleum and Natural Gas. This is up from $63.08/barrel in January. In all, the price of the Indian basket has gone up by $17.08 per bar­rel from January to March.

At the moment, India has sufficient quantities of oil and gas for eight weeks of con­sumption. This does not mean that problems will emerge once that period is over. It takes around a month for energy producers to re-start their production facilities and ship output. That gives a much smaller cushion period for India, the third-largest consumer of oil and natural gas in the world.

In 2024, oil and natural gas comprised one-third of India’s basket of energy consump­tion. Coal dominated energy consumption at 56.3 per cent. But the trouble is that energy is not fungible: coal cannot replace oil and natural gas, for example, in the transporta­tion sector and in the produc­tion of fertilisers.

India has reacted with alacrity to these developments. On March 4, Mangalore Refinery and Petrochemicals Limited (MRPL) suspended fuel exports.

MRPL refines 3 lakh barrels per day of crude oil and exports 40 per cent of its output. This is in response to difficulties in sourcing crude oil. China, too, has told its refiners to stop exports of refined products in the wake of the conflict.

In effect, global trade in energy products is being hit from both sides: crude ship­ments are grinding to a halt in West Asia and countries with refining capacity are halting exports of refined products. At the moment, the crisis is affecting Asian markets but it is only a matter of time before the damage is transmitted across the world.

India is acutely vulnerable to these disruptions. India produces roughly 0.7 million barrels per day (MBD) of oil while it consumes 5.8 MBD of oil (figures for 2024), leaving a gap of 5.1 MBD that it has to import. This is roughly 88 per cent of its consumption needs. Similarly, in the case of natural gas, India consumed 71,314 million metric standard cubic metres (MMSCM) of natural gas in 2024-25. Of this, it im­ported half of its consumption, 35,720 MMSCM, while the rest was produced domestically. India’s crude oil import bill in 2024-25 was $137 billion. In the 10 months of 2025-26 (April to January), this bill was $100 billion. This bill is likely to rise in the last two months of the fiscal in view of the war condi­tions in West Asia.

India’s economic problem is how to minimise the price impact of these imports. One option is to revert to higher purchases from Russia, something the US does not want India to do. Russian au­thorities have expressed their willingness to meet Indian demands. This was the recipe used by India to keep infla­tionary pressures under check over the last four to five years as Russian supplies were avail­able at significant discounts. This allowed India not only to manage inflation but also engage in fiscal consolidation as the government did not have to absorb the hit from expensive energy imports.

In the immediate term, in case energy supplies turn scarce and there is upward pressure on prices, the govern­ment will have no option but to absorb the hit. This will have two consequences. One, the government’s plan to reduce the fiscal deficit may come under pressure. In the 2026-27 Budget, Finance Min­ister Nirmala Sitharaman had promised to reduce the fiscal deficit to 4.3 per cent of GDP from 4.4 per cent in 2025-26. Then there is the issue of high prices hitting the external bal­ance and the current account deficit (CAD). With pressure on exports, from Trump’s erratic trade measures, higher energy prices exerting a nega­tive impact on CAD cannot be ruled out. Compared to many other countries, India is an oasis of macroeconomic sta­bility but the risks to growth are bound to increase.

Then, there are other issues that are certain to emerge soon unless the West Asian crisis blows over quickly. India uses almost 60 per cent of its LNG for manufacturing urea, a key fertiliser. Any price increase in urea as a result of higher LNG prices will also have to be absorbed by the government. The issue is partly political as India’s farmers respond nega­tively to any increase in fertil­iser prices. Urea, in any case, is a very heavily subsidised fertiliser. The downstream effect of these price increases ends up increasing prices of food, another politically sensi­tive subject.

It is unlikely, at least in the near term, that the Reserve Bank of India (RBI) will need to resort to off-cycle monetary measures. That situation remains distant for now as the government will be the “first absorber” of these pric­ing pressures. The danger to growth from tighter mon­etary policy as a result of in­flationary pressures building up remains remote. It is also likely that the government may end up reducing duties and imposts on these imports first. India has enough of a fiscal cushion to meet these contingencies as compared to other countries. But these measures are economically unpleasant in nature.