Israel, Iran conflict: India's energy security challenges as oil prices rise

The Israel-Iran conflict appears to be heading for the long haul, with both sides making escalatory moves and refusing to back off. This will not only add to the instability in the West Asian region but also affect the global economy, which is just about recovering from the Trump tariff tantrums.

There will also be a direct impact on India's energy needs, since Iran has been a long-standing partner. 

Surajit Dasgupta explains in this video:

Impact on India’s energy sector

Oil price volatility

India imports over 85% of its crude oil, with more than 40% sourced from West Asian countries like Iraq, Saudi Arabia, the UAE, Kuwait, and Qatar, much of which transits through the Strait of Hormuz. The conflict has driven oil prices upward, with Brent crude reaching around $75 per barrel and US West Texas Intermediate at $74 per barrel as of June 16, 2025.

A $10 per barrel increase in oil prices could widen India’s current account deficit (CAD) by 0.3% of GDP and raise consumer price inflation (CPI) by 0.4 percentage points, economists point out.

While India halted Iranian oil imports post-2020 due to US sanctions, Iran’s contribution to global oil supply (about 3-4%) means any disruption to its production or regional stability could still push prices higher.

Threat to strategic shipping routes

The Strait of Hormuz, a critical chokepoint for 20% of global oil and 25% of liquefied natural gas (LNG) trade, is at risk of disruption if Iran retaliates by attempting to close it, though Tehran has not made any such clear indication yet. Such a closure, though historically rare, would lead to supply delays, higher shipping costs, and increased insurance premiums for vessels navigating conflict zones, directly impacting Indian oil marketing companies (OMCs).

India’s energy security is further threatened by potential disruptions in the Red Sea and Suez Canal routes, which facilitate over $400 billion in annual trade, including oil and LNG imports.

Impact on refiners and fuel retailers

Higher oil prices and supply chain disruptions could squeeze profit margins for Indian refiners like IOCL, BPCL, and HPCL, as they may be unable to fully pass on costs to consumers due to domestic price controls, especially during politically sensitive periods. India’s strategic oil reserves, covering about 74 days (with IOCL holding 40-42 days and the rest by the government and other PSUs), provide a short-term buffer, but prolonged disruptions could strain these reserves.

LNG, other energy imports

Nearly half of India’s LNG imports, primarily from Qatar, rely on Middle Eastern routes. Any blockade or conflict escalation could increase LNG prices and disrupt supplies, affecting power generation and industrial sectors.

Impact on India’s economy

Inflationary pressures

Rising oil prices increase transportation and production costs across industries, contributing to inflation. India’s headline inflation, which eased to 2.82% in May 2025, could rise again, eroding consumer purchasing power and increasing the cost of living.

Sectors like aviation, chemicals, paints, tires, cement, and logistics, which rely on petroleum-based inputs, face higher costs, potentially reducing profit margins if costs cannot be passed on.

Stock market volatility

The Indian stock market, including the Sensex and Nifty, has shown sensitivity to the conflict, with declines of over 2% on October 3, 2024, due to rising oil prices and geopolitical uncertainties. Investors may shift to safer assets like bonds or gold, potentially reducing foreign portfolio inflows into Indian equities, which exceeded ₹1 lakh crore in 2024 and are now declining.

Government response

India’s shift toward Russian oil (35-40% of imports) has reduced reliance on Middle Eastern routes, mitigating some risks.

The neutrality of GCC countries (Saudi Arabia, UAE, Kuwait, Qatar) in the conflict provides stability for India’s trade relations.

India’s strong fundamentals, including robust forex reserves, help mitigate short-term impacts, though prolonged conflict poses risks.

The government’s focus on diplomacy, energy diversification, and fiscal measures will be critical to navigating these challenges.