| Prelims: (International Relations + CA) Mains: (GS 2 – International Relations; GS 3 – Energy Security, External Sector, Inflation & Fiscal Stability) |
International oil prices have climbed to a six-month high amid escalating tensions between the United States and Iran, raising fears of potential American military strikes on Tehran.
Brent crude has risen above $71 per barrel, reflecting market anxiety over possible supply disruptions. Recent nuclear talks in Geneva showed limited progress, while statements from U.S. leadership urging Iran to agree to a “meaningful deal” within a short timeframe have intensified geopolitical uncertainty.
Oil markets are particularly concerned about the security of the Strait of Hormuz, a critical energy transit route.
Long-Standing Rivalry
US–Iran relations have remained strained over nuclear ambitions, sanctions, and regional security dynamics.
Gulf Energy Centrality
The Persian Gulf region accounts for a significant share of global oil exports. Any instability directly impacts global energy markets.
Strategic Chokepoints
The Strait of Hormuz connects the Persian Gulf to global markets, handling a substantial portion of global petroleum and LNG flows.
Recent Escalation
Increased U.S. military presence in the region and renewed diplomatic friction have revived fears of supply disruptions similar to past Gulf crises.
Global Energy Stability: Nearly one-fifth of global petroleum consumption passes through the Strait of Hormuz.
Macroeconomic Impact: Rising oil prices fuel inflation, strain fiscal balances, and weaken growth prospects.
Energy Security for Import-Dependent Countries: Large importers like India face heightened vulnerability.
Geopolitical Risk Premium: Oil prices now incorporate a risk premium linked to potential military escalation.
Global Economic Fragility: Sharp oil price spikes can destabilise already fragile global recovery trends.
Described by the U.S. Energy Information Administration as the world’s most important oil transit chokepoint, the Strait of Hormuz handles:
Major exporters such as Saudi Arabia, Iraq, UAE, and Kuwait depend heavily on this route.
Any blockage or disruption would significantly curtail global supply.
Bypass Infrastructure
Some pipelines bypass the Strait, but capacity remains limited.
Even at full utilisation, nearly 9 million barrels per day (around 9% of global demand) would remain vulnerable during major conflict.
Additional Chokepoints
The Bab el-Mandeb, linking the Red Sea to the Arabian Sea, is also exposed to proxy attacks, increasing supply chain fragility.
Limited Disruption (Targeting Iranian Exports Only)
Oil prices may rise by $10–12 per barrel as markets adjust supply flows.
Strait of Hormuz Disruption
If energy flows are throttled, prices could exceed $90 per barrel.
Attacks on Iranian Oil Infrastructure
Extended supply outages could push prices beyond $100 per barrel.
Broad Regional Conflict
If Gulf infrastructure is targeted, prices could surge past $130 per barrel, comparable to previous geopolitical shocks.
Although Iran has threatened to block the Strait, a complete closure would be economically self-damaging.
It could:
However, in a severe escalation scenario, strategic calculations may shift.
Rising Import Bill
India imports nearly 2 billion barrels of oil annually.
Every $1 increase in crude prices adds approximately $2 billion to the annual import bill.
Strategic Vulnerability
India imports over 88% of its crude requirements, with more than 40% passing through the Strait of Hormuz.
As the world’s third-largest oil consumer, supply disruptions pose serious macroeconomic risks.
Inflationary Pressures
Higher oil prices raise transportation and production costs, fuelling inflation.
Fiscal Stress
Increased fuel subsidies or excise duty adjustments may strain government finances.
Current Account Deficit (CAD): Higher oil prices widen the trade deficit.
Currency Depreciation Risk: Increased dollar demand for imports pressures the rupee.
Energy Transition Imperative: Volatility underscores the urgency of diversifying energy sources.
Geopolitical Balancing: India must carefully manage diplomatic ties with both Gulf nations and major global powers.
Diversify Energy Sources: Expand procurement from alternative suppliers and enhance strategic reserves.
Strengthen Strategic Petroleum Reserves: Increase buffer capacity to cushion short-term shocks.
Accelerate Renewable Energy Transition: Reduce long-term dependence on imported hydrocarbons.
Enhance Maritime Security Cooperation: Work with regional partners to ensure secure sea lanes.
Adopt Flexible Fiscal Strategy: Balance inflation control with fiscal sustainability.
FAQs1. Why are oil prices rising amid US–Iran tensions? Markets fear potential military conflict that could disrupt oil supplies from the Gulf region. 2. Why is the Strait of Hormuz important? It handles nearly one-fifth of global oil and LNG trade, making it a critical energy chokepoint. 3. How vulnerable is India to Gulf supply disruptions? India imports over 88% of its crude, with more than 40% transiting through the Strait of Hormuz. 4. What could happen if the Strait is blocked? Oil prices could spike sharply, possibly exceeding $100–130 per barrel depending on the scale of disruption. 5. How can India mitigate such risks? By diversifying import sources, strengthening strategic reserves, and accelerating renewable energy adoption. |
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