The conflict is growing more hot between Israel and Lebanon: world markets are sounding warnings about the major blows that could be struck on supplies of crude oil. After Israel launched airstrikes against Hezbollah positions in Lebanon, fears about the danger of a wider regional conflict drawn in Iran, above all, are growing. The Middle East, where about 30 percent of the world’s crude oil is produced, continues to mark an important zone in the world’s energy supply.
New figures from the U.S. Energy Information Administration show that the Middle East delivers more than 20 million barrels of crude oil daily into the world market. A jump in that region could halt shipments through the Strait of Hormuz, through which nearly 20% of the world’s oil moves, causing crude prices to skyrocket even more.
Crude Oil Prices May Surge Crude oil prices already exhibited increased volatility with the conflict. Even as Israel unleashed airstrikes, Brent crude futures gained 4% and now stands at about $94 per barrel, Bloomberg data showed. Experts said that if any further military action is launched or retaliation comes from Hezbollah or Iran, crude oil prices will shoot past $100 per barrel.
A recent report from Goldman Sachs, if the conflict is going to escalate and affect oil supplies, crude prices could go up by as much as $10-15 per barrel. This would significantly impact the global energy market and could trigger a global oil supply crunch – one that is similar to past Middle East conflicts, such as when the 2019 attacks on Saudi Aramco oil facilities briefly raised oil prices by 20%. Impact on the Indian Economy For India, one of the largest importers of crude oil, the fallouts of increased oil prices would be substantial.
India’s Ministry of Petroleum and Natural Gas, said that our country imports more than 80% of its crude oil, with most of its supply coming from the Middle East. An increase in oil prices would lead to several direct and indirect consequences on the Indian economy.
According to Reserve Bank of India (RBI) data, every $10 increase in crude oil prices could raise India’s inflation by 0.40-0.50%. The current inflation rate in India, as per the latest Consumer Price Index (CPI) data from the National Statistical Office (NSO), stood at 6.8% in August 2024, already above the RBI’s target range. More shocks of fuel price increases would dent the spiral further, gaining an inch into the inflationary line beyond 7.5%, raising cost of living, transportation, and food. Depreciation of Rupee and CAD Crude oil price increase will further augment the current account deficit (CAD) of India.
Centre for Monitoring Indian Economy (CMIE), estimated that India’s CAD may escalate to as much as an additional $15 billion for every dollar increase in oil price, estimated to be approximately $10 million. It may also further tighten the Indian rupee that has been trading at ₹83.75 per USD as per the latest RBI exchange rate data. The increasing trade deficit might cause a greater depreciation of the rupee that will result in a higher price for imports and further increases in price inflation.
Fiscal Deficit and Fuel Subsidies
This can have a ripple effect on increasing the Indian government’s fiscal deficit as it can further offer increased fuel subsidies to aid in the consumers’ guarding against full price increases. Government has to spend more and this could push the fiscal deficit above the government’s target of 6.4% of GDP for the financial year 2024-25. Market Volatility Rising crude oil prices would most likely bring about volatility in Indian financial markets.
As per National Stock Exchange, sectors such as aviation, logistics, and automobile manufacturing are highly sensitive to fuel costs and will experience decreasing profit margins. These sectors’ Nifty 50 index stocks could witness major sell-offs if the crude prices continue to march upwards. Also, the FPIs already reeling on global economic uncertainty will retreat from Indian equities in case of inflation surge and further rupee depreciation.
National Securities Depository Limited, data available from NSDL, FPIs withdrew nearly ₹25,000 crores from Indian markets between August and September 2024, and an escalation in Middle East tensions could accelerate this outflow. Energy Security Concerns India’s dependence on Middle Eastern oil makes it particularly vulnerable to disruptions in the region. The International Energy Agency reports that 65% of India’s crude oil imports come from Gulf countries.
India has tried to diversify sources and invest in developing renewable sources of energy, but Middle Eastern oil still constitutes the majority of this state’s consumption. Eventually, a dramatic supply shock will exacerbate a domestic energy crisis in India. While the Indian Oil Corporation is the country’s largest oil refiner, it is still concerned over possible supply chain ripples arising from the protracted conflict, and reserves may eventually run dry if global oil shipment is severely disrupted.
The Israel-Lebanon conflict may also have deeper implications for the world at large as crude oil prices begin to soar. It is estimated that higher energy prices would push global inflationary rates upward, particularly in oil-dependent countries. Central banks in major economies may then need to raise interest rates further to control inflation, thus slowing global growth and making a recession more probable in key markets.
Israel’s airstrikes on Lebanon may appear to be a regional affair but have paramount implications for global markets, particularly for crude oil prices. Therefore, in case of a hike in crude prices, it can lead to an increase in inflation and a larger current account deficit with increased fiscal pressure in India. Stock market volatility with rising costs is likely to clip the wings of the vulnerable sectors of aviation and logistics. Energy security and inflation management will lead the most crucial role for India as tensions in the Middle East get further escalated. The situation here calls for both domestic and international policymakers to get geared up for the kinds of economic shocks that are likely to impact energy supplies, inflation, and other forms of financial stability.
