West Asia crisis roils oil, gas markets

OIL is at the heart of the economic crisis that has engulfed the world after the US and Israel attacked Iran. This is the fossil fuel that continues to be the planet’s dominant energy source despite efforts to move towards renewables. West Asia accounts for as much as 50 per cent of the global proven oil reserves and supplies 30 per cent of the world’s oil needs.

A spike in petroleum prices had been expected since the onset of the war. Even so, the jump to $100-plus per barrel on March 9 took most analysts by surprise. Prices rose to over $119, raising worries over a potential peak of $150 in case hostilities do not cease soon. There was a retreat to $89 after US President Donald Trump signalled that the war would end soon, but this is still 30 per cent higher than earlier.

To put the situation in perspective, oil prices have been in bear territory for the past year. They have averaged about $69 per barrel and even dipped to $55 last December, despite continuing geopolitical tensions. Prices began inching upwards last month and were around $72 per barrel for the Brent benchmark crude just before the attacks on Iran began on February 28. It thus took only 10 days for the prices to cross the psychological $100 barrier. The last time prices touched such heights was after the Ukraine war began in 2022.

The impetus for the sudden hardening in oil markets was the decision of several West Asian countries to cut output, including the United Arab Emirates, Kuwait, Qatar and Iraq. This followed Iran’s attacks on energy facilities in the region as well as Israel’s air raids on Iran’s oil infrastructure.

The immediate impact of these developments has been stock market volatility around the globe, stretching from the US to Europe to Asia. The Group of Seven (G7) — comprising advanced economies — has offered to release stocks from their huge petroleum reserves, prompting a moderation in the price spike. But this is likely to have only a temporary effect on oil markets. With energy facilities continuing to be targeted and crucial sea passages blockaded by Iran, a price surge is not likely to ease anytime soon.

What is of equal concern is that natural gas prices have also shot up. The European benchmark prices of liquefied natural gas (LNG) have risen by as much as 40-60 per cent. This is largely due to output difficulties in Qatar, which accounts for about 20 per cent of the world’s total LNG supplies. Much of this natural gas moves through the world’s most sensitive petroleum chokepoint, the Strait of Hormuz, a narrow corridor which connects the Gulf of Oman to the Persian Gulf. As much as 30 per cent of global oil supplies and 20 per cent of natural gas shipments move through this route.

At the global level, the spurt in prices and the logjam created by the inability to move cargo ships and tankers through normal sea routes has created multiple crises. Insurance covers have been withdrawn as ships are being targeted, export cargoes are held up at ports, air travel has become expensive and energy prices have already shot up in many countries.

India faces many challenges, especially at a time when the economy seemed to be moving towards a consistently high growth path. After 7.1 per cent in 2024-25, growth is projected to touch 7.6 per cent in 2025-26. The scenario, however, has altered dramatically with the Iran war. On energy, a short-term availability crisis has been averted as the country has petroleum stocks of up to eight weeks’ requirements. This includes reserves in underground storages created on the western and eastern coasts as well as inventories with refineries.

Yet there is a question mark over the availability of liquefied petroleum gas (LPG). As much as 85 per cent of LPG imports move through the blockaded Strait of Hormuz. Domestic refineries have already been directed to step up LPG output, while priority is being given to cooking gas consumers. The issue of fertiliser imports from West Asian countries is another concern as shipments remain disrupted. A prolonged conflict could eventually affect availability, though stocks are reported to be adequate for the coming kharif season.

The inflationary impact of the sudden rise in oil and gas prices has to be factored into the projections for economic growth in the upcoming financial year (2026-27). If global oil prices continue to stay at high levels, the rise in the costs of imported raw material and intermediates will lead to a corresponding rise in the cost of finished goods. This could, in turn, impact GDP growth. According to the Reserve Bank of India, a 10 per cent rise in crude prices could reduce real GDP growth by up to 15 basis points.

The question is, what can India do to insulate itself from the global crisis? The first step is to continue with the policy of diversifying sources of oil supply that has served it well till now. Despite US objections (prior to the 30-day “waiver”) to India’s oil purchases from Russia, these still comprise 30 per cent of the total imports. They are now set to expand further to avoid reliance on crude supplies from the Gulf region.

The second is to contain the inflationary impact by ensuring that petrol and diesel prices are kept stable in the medium term. Oil marketing companies have been able to build up a cushion of resources over the past year marked by relatively low global oil prices. This should enable them to absorb the latest oil shock. January data shows that inflation has been well within the central bank’s acceptable range at 2.75 per cent. External headwinds, however, may deepen inflationary pressures in the coming days.

The skyrocketing international oil prices have the potential to create a perfect storm for the economy. But India is not alone in facing this crisis. The entire world has to tackle the consequences of a war that has engulfed the oil-rich nations of West Asia. One can only hope that better sense prevails sooner rather than later to end a conflict that can only have disastrous outcomes for the global economy.