Oil is on the boil again. With West Asia getting dragged into another war, crude oil prices have surged past $76 a barrel from around $60 a month ago. Some oil infrastructures in Iran, which has the world’s third largest reserves of crude and second largest reserves of gas, have come under attack by Israel. Even in a market where its scope is heavily curtailed by Western sanctions, Iran is the ninth-largest oil producer with a large amount of its exports going to China. The war also threatens disruption of supplies through the Strait of Hormuz, a critical sea passage in the region through which between a fifth and a quarter of the world’s seaborne traded oil passes. These fears have pushed crude prices through the roof, with several analysts estimating prices to cross the $100 mark if the geopolitical tensions persist. The uncertainty of a diplomatic solution anchored by the US has not helped the situation. The rising prices would be a big blow for India, which has successfully managed to keep inflation below 4 percent this financial year. Higher prices can be a double whammy—on inflation as well as the current account deficit.
India’s crude oil basket has hit the $76 mark after averaging $67-68 in April and May. The country had managed to keep its oil import bill in check, with the value of crude imports rising by only 2.7 percent in 2024-25. However, if oil prices surge along the trajectory they have been predicted to, the import bill would rise drastically and feed retail inflation. There will also be the risk of imported inflation, with manufacturing and freight costs rising elsewhere. India is successfully transitioning on the path of green energy, but it is still heavily dependent on fossil fuels, 80 percent of which it imports. A recent report by the International Energy Agency suggests India could be the primary global demand driver for petroleum products through 2030. It says oil demand in India is expected to increase by 1 million barrels per day between 2024 and 2030. Therefore, any escalation in tensions in West Asia can hit the country’s economic interests in the short and medium terms, despite the recent rush of positive news on the domestic macroeconomic front.