Israel-Iran tensions and the global fuel reserve: What it means for India?

With the recent upsurge between Israel and Iran, there are grave fears of the stability of fuel supply and volatility in fuel prices in the coming days even with such a formidable nation like India which has strong fuel reserves at present.

During the initial days when the hostilities between the two countries had escalated, both Israel and Iran have sustained considerable losses in the very important energy infrastructure. Israeli air assaults tried to attack the Iranian oil and gas fields and this one tested the South pars gas field that is the largest gas field in the world that made part of its production come to a standstill. Iran as a retaliation, sent missiles and drones to attack Israeli energy facilities, which had to close down most offshore gas and refinery fields. Such attacks have already caused trouble to the energy production and export of both the nations where the exports of oil in Iran have almost come to a halt and Israel has lost about two-thirds of its gas supply The recent escalation between Israel and Iran has sent shockwaves through global energy markets, raising concerns about fuel supply stability and price volatility, even for countries like India, which currently has robust fuel reserves.

In an ironic twist of events, Israel has previously been making attacks on some of Iranian vital oil and gas stations, such as one of the key fuel depots as well as one of the offices of Tehran and also on the famous gas field of South Pars which is the biggest in the world. This is the most serious escalation of attacks that have seen Iran partly shut down operations at the South Pars gas field where production alone holds nearly two-thirds of the country. Israeli energy infrastructure has also been targeted with retaliatory missile and drone strikes, causing key gas fields and refineries to be shut down. Aditi Gupta, Economist at Bank of Baroda, offered a measured perspective: “The uptick in crude prices appears to be a knee-jerk reaction to the conflict in the Middle East. It seems likely that the situation would de-escalate in a gradual manner, which implies that we can expect crude prices to return to the levels before the tensions flared. Hence, the impact on CPI is not likely to be significant.”

Why does this matter globally?

Iran possesses the third-largest amount of crude oil in the world and plays a dominant part in the OPEC production, whereas the region also includes the Strait of Hormuz which is a narrow waterway around which flows a percent of world oil each day. This place can cause any interruption to cause a surge in the price of oil globally and even the consistent supply of fuel in the world market. As it was, the conflict already sent the price of oil up by almost 9 percent in the past couple of days, and the markets are expected to endure more volatile movements as the situation unfolds. Phil Rosen, financial commentator, observed, “Brent crude, the international oil benchmark, closed Friday at 74.23 dollars a barrel, up about 6.4% from the day before Israel's surprise strike on Iran,” highlighting the immediate market reaction to the conflict.

Much of the crude oil consumed in India is imported especially in the Middle East particularly in Iran and Iran neighbors. Although India has accumulated large strategic petroleum reserves to cushion against abrupt natural shocks in the supply of petroleum, she is not exempt from global price fluctuations. Despite the abundance of reserves, a sudden and prolonged increase in international crude prices would result in increased cost of importation, which may have a potential to affect prices of domestic fuel and inflation.

In case the conflict escalates to a greater height- more so, in case Iran decides to seal the Strait of Hormuz- it is likely that the prices of oil will go up through the roof, not only in India, but also the worldwide economy. Although India has a buffer, it is not a long term protection against disruptions or high prices.

Future outlook: Vigilance and preparedness needed

Although the current availability of fuel in India somehow gives a short term security, the Israel- Iran war only depicts a clear image of how the world is indeed interconnected as far as energy markets are concerned. When there is some sort of shake-up in the Middle East; that shake-up is experienced worldwide. In case of further worsening of the crisis, the Indian policymakers will need to be alert and keep themselves informed of the events and prepared to absorb the impact of any price shock and supply deficiency.

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