The fact is, the US-Iran war has upturned the state of the global economy more than any other conflict in recent times. The reason? It has touched a region that has been one of the biggest sources of crude oil and natural gas over the past century.

The impact of these geopolitical events will have a direct bearing on India’s energy security in the coming days. The first and immediate issue is dealing with the burden of high oil prices that will lead to a spike in the country’s import bill. 

India’s Energy Security

For an economy that meets about 85% of its fuel needs from abroad, the price of oil becomes a critical element in managing the economy. The oil import bill was US$ 139 billion in 2024-25 and US$ 135 billion in 2025-6. 

With prices having gone up in the current fiscal year, the cost of imports has already risen by over 50% in the April-July period with roughly the same volume of purchases. The overall bill at the end of the year is thus likely to be far higher than anticipated earlier. This could in turn lead to a widening of the current account deficit, which has so far been contained at 0.5% of GDP in the first quarter of 2026-27. 

What is equally worrying is the prospect of inflationary pressures on the economy. So far, the government has not allowed the full pass-through effect of higher world oil prices at the retail level. Though oil marketing companies raised pump prices in May this year, they continue to face the burden of under-recoveries as the full effect of higher global costs has not been passed on to consumers. 

Despite this effort to minimise the impact at the retail level, the same cannot be done for industry, which uses a huge gamut of petroleum products, including aviation turbine fuel. As natural gas prices are also rising due to disruptions in supplies from West Asian countries like Qatar, the prices of a wide range of goods, especially those based on petrochemicals, have already shot up since March. The trend will intensify unless international oil and gas prices moderate in the near future.

In this backdrop, there must be worries over the prospect of sustaining a high growth path for the Indian economy in FY2026-27. The first quarter of GDP data (April-June) has recorded 7.8% growth, indicating considerable resilience in tackling external headwinds. Whether this scenario will continue for the rest of the year will depend largely on the subsiding of geopolitical tensions.

How Things Spiralled

Iran itself is a major energy producer, with the world’s third-largest reserves of crude oil and natural gas. Its output had already been constrained by American sanctions in recent years, and further supply cuts would not have had much effect on world markets. 

The problem is that the conflict has led to attacks on oil infrastructure located in neighbouring West Asian producers like Qatar, the United Arab Emirates, Kuwait, Iraq, and Saudi Arabia.

The war’s impact widened with the blockade of the Strait of Hormuz, a key chokepoint which normally sees the passage of about 20% of the world’s oil supplies. The stalemate seemed to have been resolved in mid- June with the conclusion of a memorandum of understanding between the US and Iran as a prelude to ending the war. 

This was not to be, however, as attacks and counter-attacks resumed shortly afterwards. Oil prices, which had fallen to around US$ 74 per barrel, began to harden yet again. 

Impact Of Houthi Attacks

As bad as the situation has been till now, it became far worse recently with the growing role of the Yemen-based Houthi rebels. The Houthis, backed by Iran, began in July to attack Saudi vessels moving through another vital inlet, the Bab-el Mandab. This provides access to the southern end of the Red Sea. 

It must be noted that the narrow passage is not just a route enabling the exit of Saudi vessels carrying oil and gas into the Gulf of Aden and the Indian Ocean, it is a major chokepoint for global merchant shipping. As much as 12% of world trade passes through the inlet, which is even narrower than the Strait of Hormuz. All merchant shipping from Asia, including India, moves through this passage to the Suez Canal to reach cargoes to Western markets.

The Iran-supported Houthis have recently taken full control of Bab-el-Mandeb by annexing port towns as well as islands in the middle of the passage. They claim to be targeting only Saudi-linked vessels, but the fear of being attacked has pushed insurance costs upwards, leading to a sharp fall in the flow of cargoes. Merchant vessels are increasingly taking the longer and more expensive route round the Cape of Good Hope. 

Saudi Arabian oil supplies to Asian countries, including India, have been hit hard. Even the East-West pipeline, which provided oil to the Red Sea ports of Yanbu and Jeddah, has now been closed down due to drone attacks. 

With both the Strait of Hormuz and Bab-el-Mandeb having been blockaded by Iran and the Houthi rebels, oil markets have reacted predictably by sending prices skyward. Not just crude prices but even refined products like diesel have shown a sharp price increase, as refinery infrastructure in Russia has been damaged in the Ukraine war.

Where Will Oil Prices Go?

As for the million-dollar question of where oil prices will move in the coming months, the trajectory will depend on a few key factors. 

One is the overall outlook for demand, which is looking tepid for the time being. With China’s appetite for oil having diminished greatly over the past two years, the global demand for oil has stabilised.  Projections by the International Energy Agency indicate that demand will fall by 2 million barrels per day in 2026 though it looks forward to an uptick in 2027.

Another is the system of production quotas that is imposed on exporting countries by the Organisation of the Petroleum Exporting Countries (OPEC) Plus. The cartel, which includes Russia and its allies, has tried to ensure that market prices do not fall by insisting on production quotas. It may not be as successful in future as member countries are seeking to raise output to meet their resource requirements. The UAE, for instance, has already left the group.

The most significant factor, however, in deciding the state of oil markets in the short run will be the US-Iran war. It has dragged on for much longer than had been anticipated and has had expected repercussions on the global energy scenario. It would be difficult to make any predictions on oil prices till the clouds of war continue to be on the horizon. 

In case the conflict ends quickly, oil prices could settle down to a manageable level of US$ 70-75 from the existing US$ 100 plus per barrel. On the other hand, if it drags on for much longer, consumers in India and around the world will end up paying the price for a situation beyond their control.