Impact of the West Asia War on Crude Oil Prices: An Indian Perspective

West Asia is home to the world's largest oil producers, including Saudi Arabia, Iran, Iraq, Kuwait, and the UAE. This concentration has significant implications for international oil prices because any conflicts in this region can directly affect global oil supplies. When conflicts and wars increase in West Asia, oil prices tend to rise. Currently, due to increased tension in Iran and at sea, oil prices have risen. This has created ripples in energy-dependent nations like India.

Another important region is the Strait of Hormuz. Every day, one-fifth of all oil shipments pass through this narrow strait. Conflicts in this region make oil supplies to the world unpredictable. Even minor disruptions to oil tankers passing through the Strait of Hormuz are enough to cause an immediate rise in oil prices on the international oil market. 

India is particularly vulnerable to any disruptions to oil supplies through this region because a significant portion of its oil supplies pass through this region. The increase in oil prices is not only an energy security concern in India, but it has implications for prices, shoppers, and even the cost of living, thereby affecting inflation rates.

Why India is highly vulnerable to oil price shocks

India is the third-highest consumer of crude oil in the world, but its domestic production meets only a small fraction of its requirement. India is a significant net importer, with over 85% of its requirement being met through imports. Since oil is priced in dollars, a rise in oil prices also means a rise in the demand for dollars, which in turn weakens the Indian rupee.

Higher oil prices also affect the government’s finances. There is often a political and social pressure on the government to reduce taxes on fuel and increase subsidies to shield the Indian economy from the impact of volatile oil prices.

Rising oil prices and India’s Consumer Price Index (CPI)

A hike in oil prices will have an impact on the Indian economy through an increase in inflation levels indicated by the Consumer Price Index (CPI). The CPI monitors the prices that an average household pays for various goods and services. This includes food, transportation, shelter, energy, and manufactured goods. The sector that will be most immediately affected by the price hike will be the transportation sector of the CPI, leading to an increase in the price of goods.

Moreover, many industries use petroleum-based products such as plastics, chemicals, and synthetic materials. These petroleum-based products tend to become costlier. Some power plants use petroleum-based fuels to produce electricity, whose prices increase, causing production to slow down.

Additionally, there is a shortage of LPG gas cylinders in the country, which has paved the way for the black market to flourish. A report from Business Standard says, “Earlier the price of an LPG gas cylinder was ₹913 ($9.9) for 14.2 kilograms, which has now increased by 7%, making it ₹976.91. In the black market, the rate is ₹2000 per LPG gas cylinder.” It is expected that LPG prices will rise to ₹5000 per cylinder. This situation will lead to stagflation in the coming days, and restaurants might shut down due to a shortage of fuel. The consequences of the war will take a serious toll on Indian households.

Vinit Bolinjkar, Head of Research at Ventura, said, “Stay cautious on aviation, gas importers/city gas, OMCs, and crude-derivative users such as paints, tyres and chemicals. Airline fuel typically accounts for about 20–25% of operating costs, LNG supply is already being rationed after the Gulf disruption, and the market has started punishing these pockets first.”

Government Response and Policy Measures

India is dealing with a roller-coaster of oil prices in an international market with a multi-pronged strategy. Diversification of oil imports is a part of it. India is sourcing oil from a broader range of countries rather than relying only on West Asian countries; it now imports oil from Russia and the United States as well.

Another part of the strategy is the use of strategic oil reserves. These oil reserves help the government tap into them in the event of a crisis and thereby ensure a stable supply of oil in the face of a volatile market.

However, in the future, the emphasis will be on renewable energy to reduce dependence on imported fuels in the first place. Investments in solar power, wind power, and green hydrogen are part of a broader plan aimed at reducing dependence on oil and thereby reducing the impact of oil price fluctuations.

Another part of the strategy aimed at reducing the impact of oil price fluctuations in the international market is the promotion of electric vehicles and energy-efficient technology.

Conclusion

The conflict in West Asia highlights the close relationship that geopolitics has with the global energy market. When a conflict occurs in a major centre of oil production, the price of crude rises as investors worry about a potential disruption in supplies, as well as shipping risks.

The effect of this is felt by India in a very practical way. The increase in crude oil prices means that India will have to pay more for its imports, which will be reflected in the inflation rate as measured by the CPI.

This is why a case can be made for India to enhance its energy security by diversifying its sources of crude oil, as well as hastening its shift to alternative sources of energy.