KKN Gurugram Desk | The escalating conflict between Iran and Israel has sent shockwaves through global energy  markets, leading to the sharpest single-day spike in crude oil prices in over three years. As missile exchanges continue between the two nations, the potential for long-term geopolitical instability is pushing oil prices dangerously high. This sudden price surge is expected to have serious economic consequences for countries around the world — particularly oil-import-dependent nations like India.

Amid fears of prolonged warfare and regional disruption, market analysts are warning that global oil supply chains are under threat. Here’s a detailed look at the five biggest impacts of the Iran-Israel conflict on crude oil prices and how it could affect India and the world economy.

1. Supply Disruptions: Iran’s Oil Shipments Already Hit

Iran contributes around 2% of global crude oil demand, and most of its exports are routed through Kharg Island, located in the Persian Gulf. Recent satellite imagery reveals a significant drop in oil shipments from the region. Notably, Iran has reportedly evacuated areas surrounding the Kharg Island terminal — a strategic export hub.

While the Strait of Hormuz — the world’s most vital oil transit chokepoint — remains operational for now, even minor disturbances in Iran’s oil exports are tightening global supply. A full-scale shutdown could significantly reduce oil availability, leading to higher prices worldwide.

2. Potential Supply Cut-Off: Iran Could Halt Exports Under Pressure

If the conflict deepens and pressure from Israel and the United States increases, Iran may retaliate by completely halting oil exports. Adding to concerns, other critical oil infrastructure in the Gulf region may come under threat from Iranian missile strikes.

Many of the Middle East’s top oil-producing nations, including Saudi Arabia, UAE, and Kuwait, have facilities within the range of Iran’s missile systems. Any disruption in their operations would have ripple effects across global markets. Such a scenario could leave importing nations like India, Japan, and several European countries grappling with severe fuel shortages.

3. Dependence on Saudi Arabia and UAE Likely to Rise

With Iranian oil at risk, global dependence on Saudi Arabia and the UAE is expected to intensify. According to industry estimates, these two nations can jointly produce an additional 3 to 4 million barrels per day, which might temporarily cushion the blow.

Saudi Arabia alone, through its state-owned oil giant Aramco, produced around 12.7 million barrels per day in 2024. The kingdom also holds the second-largest proven oil reserves globally — over 267 billion barrels. However, ramping up production may take time and could still fall short of offsetting a full Iranian supply freeze.

4. Strait of Hormuz at Risk: A Choke Point for Global Oil

In a worst-case scenario, Iran could choose to block the Strait of Hormuz — a narrow waterway between the Persian Gulf and the Gulf of Oman. This strait is responsible for transporting about 20% of the world’s oil and a significant share of global natural gas.

According to ICRA, nearly 45–50% of India’s total crude oil imports come via this maritime route, mainly from Iraq, Saudi Arabia, UAE, and Kuwait. If this critical supply line is disrupted, crude oil prices could jump by 20% or more overnight.

Such a closure wouldn’t just impact oil but also paralyze shipping, insurance, and global trade in one of the world’s most economically strategic corridors.

5. India’s Economic Stability Faces Serious Risk

India imports 85–88% of its crude oil needs, making it extremely vulnerable to global oil price volatility. According to data from 2023–24, India’s top oil suppliers included Iraq, Saudi Arabia, Russia, and the UAE — all of which rely on the Hormuz Strait for shipping.

ICRA, a leading credit rating agency, warns that any disruption in oil and gas supplies through Hormuz could adversely impact India’s economy. The nation may face a spike in its oil import bill, widened current account deficit (CAD), and an overall increase in inflation.

ICRA estimates that a $10 per barrel hike in crude oil prices could raise India’s oil import expenses by $13–14 billion annually. This would not only affect government spending and fuel subsidies but may also discourage private sector investment, slowing down economic growth further.

Global Context: Inflation, Recession Fears, and Market Instability

This surge in crude oil prices comes at a time when the world is already grappling with high inflation, interest rate volatility, and sluggish economic recovery post-COVID. Rising fuel costs could:

• Increase transportation and logistics expenses

• Push up prices of essential goods and services

• Cause monetary tightening in vulnerable economies

• Accelerate currency depreciation in oil-importing countries

For developed economies such as the United States and Europe, this could reignite fears of stagflation — a situation marked by slow growth and high inflation.

Stock Markets and Oil Futures React

As the conflict unfolds, global stock markets have become jittery. Oil futures on the New York Mercantile Exchange (NYMEX) and Brent Crude Index have already shown volatility, with prices crossing the $100 per barrel mark in after-hours trading. Energy sector stocks have rallied, while airline and logistics sectors have seen sell-offs due to fears of rising operational costs.

Can OPEC or the US Ease the Crisis?

Analysts are watching closely to see whether OPEC+ nations or the United States Strategic Petroleum Reserve (SPR) will step in to ease pressure on oil supply. While some buffer capacity exists, geopolitical risk premium is likely to stay elevated as long as Iran-Israel tensions remain unresolved.

Any intervention by global powers could also change the trajectory of the war — for better or worse — and influence oil prices directly.

The Iran-Israel war is more than just a regional military confrontation; it is a potential global energy crisis in the making. If the conflict drags on and supply lines like the Strait of Hormuz are blocked or if missile attacks target vital oil infrastructure, the world economy could face a severe oil shock similar to that of the 1970s.

For India, already burdened by a high oil import bill, this could mean higher fuel prices, rising inflation, weaker currency, and slower GDP growth in the upcoming quarters.

As the situation continues to develop, governments and energy policymakers across the world must prepare for possible supply shocks and financial turbulence in the second half of 2025.