Israel-Iran conflict: How will rising crude oil prices affect India?
The Israel-Iran conflict has triggered a spike in crude oil prices, which could exceed $100 per barrel in the worst-case scenario. Will India be able to absorb this?
Israel and Iran are locked in a major conflict that has shown no signs of de-escalating in the past three days. The brunt of the crisis was first borne by crude oil prices, with Brent crude futures jumping 7% on Friday to $74.2 per barrel. While India is vulnerable to crude oil prices as it meets 88% of its oil demand through imports, the impact is unlikely to be huge, especially in terms of fuel prices.
Brent crude oil futures are currently hovering around $75 per barrel, but so far, they have reversed the recent decline that had taken prices to a recent low of $64 per barrel on average in May, rather than posing additional risks. Crude oil prices are currently below the levels seen in January this year. What needs to be watched is where the conflict is headed, and how much more oil price of oil will increase. JP Morgan has downplayed geopolitical concerns and forecast oil prices in the $60s per barrel in 2025 and 2026, Reuters reported. However, there is a worst-case scenario: the closure of the Strait of Hormuz—the only sea passage from the Persian Gulf to the open ocean—which could disrupt oil supply and could even push oil prices to $120-130 per barrel.
Also read: Israel vs Iran could be worse for markets than Russia vs Ukraine. Here’s why.
Iran has already threatened to shut down the Strait of Hormuz, which accounts for roughly a fourth of maritime oil trade. Five of the top 10 oil producers rely heavily on the passage for oil trade, and about 70% of the oil is destined for Asian countries.
Impact on India
India has a fair amount of exposure (over 50% of total imports) to Middle East oil producers that rely on the Strait of Hormuz, even though the country has not been importing from Iran amid sanctions imposed by the US. However, this is a big unknown at the moment, with energy experts downplaying such a move as it would disrupt oil trade with China, which is Iran’s largest oil consumer, CNBC reported. Iran and China are also strategic partners.
Also read: Govt to hold talks with exporters as Iran-Israel conflict stalls shipments, drives up costs
Iran has threatened to close the Strait of Hormuz several times in the past, but has never actually done so. As such, experts see a minimal impact of the current conflict on India, especially since some of the impact is likely to be cushioned by a higher-than-expected supply of oil by the Organization of the Petroleum Exporting Countries (OPEC) and its allies. "With OPEC+ announcing higher-than-expected production increases, oil markets remain well-supplied, and further Iranian supply cuts can be accommodated," noted Madhavi Arora, chief economist at Emkay Global Financial Services. Emkay Global projects Brent crude prices will stabilise around $70 per barrel in 2025-26.
Fuel has a cushion
The immediate impact of crude oil price rises used to be on fuel prices and thereby on India’s inflation trajectory. According to the Reserve Bank of India, every 10% increase in the price of crude oil, if there is a complete pass-through, could lead to an increase of 30 basis points in retail inflation. However, fuel prices have not moved in tandem with crude oil prices in several years, attracting criticism from market watchers, analysts and the general public.
Also read | Mint Explainer: Will Iran shut the Strait of Hormuz?
In April, the union government increased excise duties on petrol and diesel by ₹2 per litre as crude oil prices declined, while allowing room to keep retail prices unchanged. The movement in crude oil prices and petrol and diesel prices suggests that the swing in the former has not had much impact on the latter. As such, unless oil prices go through the roof, a significant increase in fuel prices is unlikely.
topics
