The ongoing geopolitical tensions in West Asia have once again exposed the fragility of global energy security, pushing Brent crude oil prices above $125 per barrel—the highest level since March 2022. This surge reflects a dangerous convergence of conflict, supply chain disruptions, and weakening institutional coordination among oil-producing nations. At the heart of this crisis lies the Strait of Hormuz, a narrow but critical maritime passage that has become the focal point of escalating military tensions and global economic anxiety. While the repercussions are global, India—one of the world’s largest energy importers—faces particularly acute challenges as it navigates rising costs, currency pressures, and policy trade-offs.
Strait of Hormuz: The epicentre of global energy risk
The Strait of Hormuz remains the single most important chokepoint in the global energy architecture, handling nearly 20% of worldwide oil shipments and a significant share of liquefied natural gas (LNG) exports. The current disruption—triggered by heightened hostilities involving Iran and the United States—has severely constrained tanker movement. Naval deployments, suspected mine placements, and persistent drone threats have turned routine transit into a high-risk undertaking.
Although Iran has signaled a conditional reopening of the strait under its military oversight, the confidence of global shipping firms remains deeply shaken. Marine insurers have either withdrawn war-risk coverage or raised premiums to prohibitive levels, effectively making transit economically unviable for many operators. As a result, thousands of vessels remain stranded or rerouted, leading to significant delays in oil, LNG, and even fertilizer shipments.
For India, which imports nearly 85% of its crude oil requirements, the Strait of Hormuz is not merely a distant geopolitical concern—it is a lifeline. A major portion of India’s crude imports from Iraq, Saudi Arabia, and the UAE pass through this route. Any sustained disruption has immediate implications for domestic fuel prices, inflation, and energy security planning.
Fragile ceasefire and persistent uncertainty
Diplomatic efforts to bring stability to the region have yielded only short-lived and fragile ceasefires. While international mediators have facilitated temporary truces, violations continue to emerge, particularly along sensitive zones in Lebanon and the Persian Gulf. The absence of a credible and durable peace framework means that oil markets remain heavily influenced by geopolitical headlines.
This environment of uncertainty has made price forecasting exceedingly difficult. Traders, policymakers, and energy companies are forced to operate under conditions of elevated risk, where even minor developments can trigger sharp price fluctuations. For India, such volatility complicates macroeconomic planning, especially in areas such as inflation targeting, fiscal budgeting, and energy procurement.
UAE’s exit from OPEC: A structural shift
Adding another layer of complexity is the recent exit of the United Arab Emirates from OPEC. As one of the major oil producers in the Gulf, the UAE’s departure weakens the cartel’s cohesion and its ability to regulate global supply effectively. Historically, OPEC has played a stabilizing role by adjusting production to manage price cycles. A fragmented OPEC, however, reduces the predictability of supply responses to crises.
In the short term, this move has heightened uncertainty rather than alleviating supply concerns. Markets are unsure whether the UAE will significantly ramp up production independently or prioritize revenue maximization through controlled output. In the longer term, this could lead to a more competitive and less coordinated oil market structure, increasing volatility.
For India, which has traditionally benefited from stable long-term supply agreements with OPEC members, the weakening of collective decision-making creates new challenges in negotiating favorable import terms.
India’s energy strategy under stress
India stands at the center of this unfolding crisis as one of the most vulnerable large economies. The country’s heavy reliance on imported fossil fuels exposes it to both price shocks and supply disruptions.
1. Rising import bill and currency pressure
As oil prices rise above $120 per barrel, India’s import bill expands dramatically. This puts downward pressure on the rupee, which tends to weaken against the US dollar in such scenarios since oil is traded globally in dollars. A depreciating rupee further amplifies the cost of imports, creating a vicious cycle. This has direct implications for inflation, especially in fuel and transportation costs.
2. Inflation and monetary policy challenges
Higher crude prices feed into retail inflation through fuel, logistics, and manufacturing costs. If inflation breaches the Reserve Bank of India’s target band, the central bank may be forced to tighten monetary policy by raising interest rates. While this can help control inflation, it also risks slowing economic growth—a difficult trade-off in an already uncertain global environment.
3. Fiscal pressure and subsidy burden
The government faces a delicate balancing act between protecting consumers and maintaining fiscal discipline. Rising fuel prices often prompt cuts in excise duties or higher subsidies for LPG and fertilizers. While these measures provide short-term relief, they widen the fiscal deficit and constrain public spending in other areas such as infrastructure and social welfare.
4. Strategic Petroleum Reserves (SPR)
India has been actively expanding its strategic petroleum reserves to cushion against supply shocks. However, current reserves can cover only a limited number of days of consumption. In a prolonged disruption scenario, these buffers may prove insufficient, underlining the need for further capacity expansion.
India’s adaptive measures and diversification strategy
Despite these challenges, India has taken several proactive steps to mitigate risks:
- Diversification of supply sources: India has increased imports from Russia at discounted rates and explored supplies from countries like Venezuela.
- Renewed engagement with Iran: The resumption of limited imports from Iran reflects India’s pragmatic approach to securing energy supplies despite geopolitical sensitivities.
- Biofuel and ethanol blending: India has accelerated its ethanol blending program, aiming to reduce crude dependency and promote cleaner energy.
- Investment in renewables: Solar and wind energy expansion remains a long-term priority to reduce reliance on fossil fuel imports.
- Diplomatic balancing: India continues to engage with multiple stakeholders, maintaining strategic neutrality while safeguarding its energy interests.
Global economic ramifications
Sustained oil prices above $120 per barrel have far-reaching implications:
- Inflation surge: Energy costs drive up prices across sectors, particularly food and manufacturing.
- Recession risks: High input costs can dampen economic activity, especially in energy-importing regions like Europe and Asia.
- Capital flows: Emerging markets, including India, may experience capital outflows as investors seek safer assets in developed economies.
- Supply Chain Disruptions: Increased costs and delays in shipping affect global trade flows.
Price outlook and future scenarios
Energy market forecasts remain sharply divided. Some projections suggest that Brent crude could rise to $130 per barrel if disruptions in the Strait of Hormuz persist. Others anticipate a gradual decline to below $90 by late 2026, contingent on a durable ceasefire and stabilization of supply chains.
For India, the outlook depends heavily on geopolitical developments. A prolonged conflict would necessitate more aggressive policy interventions, while a ceasefire could provide much-needed relief to both markets and policymakers.
