Increase in Oil Prices Amidst Iran-Israel Tensions

General Studies Paper -2

Context: Recent tensions between Iran and Israel have led to a spike in global oil prices.

About

• In mid-June 2025, the renewed military flare-up between Iran and Israel sent shockwaves through energy markets.
• The Brent crude futures surged by nearly 9% on June 13 to $75.65 per barrel, peaking at $78.50, a near five-month high.

Reasons for Increase in oil prices

• Vulnerability of the Strait of Hormuz: The Strait of Hormuz connects the Persian Gulf to the Arabian Sea and is the world’s most crucial oil transit chokepoint.
  • In 2024, it facilitated the transport of around 20 million barrels per day, about 20% of global petroleum liquids consumption.
  • Countries such as Saudi Arabia, UAE, Kuwait, Iraq, and Iran rely on this route for exports.
  • Closure or disruption, even temporary, raises shipping delays, and energy costs.
• Potential Supply Chain Disruptions: Conflict in the Middle East could also hinder access to the Suez Canal and the Red Sea, affecting alternative maritime routes and leading to logistical and financial challenges for global oil trade.
• Risk Premium: The possibility of a large-scale conflict or blockades results in speculative buying and a risk premium on oil, pushing prices up even before any physical supply disruption occurs.

Implications for India

• Rising Import Costs: India imports over 80% of its crude oil. As the global price increases, it will raise India’s overall import bill.
• Inflationary Pressures: A rise in crude oil prices can spill over into transport, logistics, and manufacturing, causing a rise in retail inflation.
• Economic Growth and Investment: A sustained surge in prices may dent corporate profitability and delay private sector investments, especially in energy-intensive sectors.

Way Ahead

• Accelerate Renewable Energy Transition: Reducing long-term dependence on fossil fuels.
  • Strengthen Strategic Petroleum Reserves to cushion short-term shocks.
• Diversify Energy Sources: Including gas imports, biofuels, and electric mobility.
• Diplomatic Engagements: To support de-escalation and secure oil supply routes.

Concluding Remarks

• The ongoing Iran-Israel tensions have revived global concerns about energy security and price stability.
• For India, the conflict is a reminder of the country’s high vulnerability to external shocks due to its dependence on oil imports.
• While current reserves and diversification strategies offer some resilience, a prolonged conflict could have significant economic and fiscal consequences.