Ever since Iran hit Israel with a missile barrage on October 1, a potential conflict between the two has created fear in the energy markets.
The worst-case scenario being envisaged is a retaliatory strike by Israel either on Iran’s nuclear facilities or its oil infrastructure. A strike on Iran’s oil infrastructure will hit Iran’s oil exports, a financial lifeline for Tehran. Iran’s potential retaliation could seriously affect the oil and gas production in its neighbouring countries, dealing a far more serious blow to the global energy market. The oil exports of Saudi Arabia, Kuwait and Iraq are shipped from Persian Gulf ports and pass via the easily-blocked Hormuz straits. The kingdom of Qatar, also a mediator in the Gaza conflict, lies entirely within the Persian Gulf and is one of the world’s largest exporters of liquefied natural gas.
A serious escalation puts all of these at risk. Higher prices of oil and gas affect consumers around the world, not just those importing oil from the conflict zone.
Anxiety over a strong Israeli response peaked on October 7, the first anniversary of the Hamas attack on Israel, when the price of crude oil shot up by over 10% to over $80 per barrel. It has since receded, somewhat. If the worst case does come about, the price of oil will shoot up well past $100 a barrel, triggering a global economic crisis. These fears have led Israel’s closest ally, the U.S., to call for a ‘proportional response’, i.e. one that doesn’t target Iran’s energy or nuclear infrastructure.[1] These calls may be partly motivated by a desire to keep petrol prices low just before the November 5 U.S. Presidential election.
Despite the rhetoric, Tehran seems to have acted with caution. Iran claims to have targeted three military bases,[2] and Israel claims it was able to stop most of the missiles with little to no injuries.[3] While Iran’s economy continues to be in shambles, it has managed to increase its oil production and exports. Iran’s oil production in 2022 was 2.5 million barrels per day, which had increased to 3.2 million barrels per day by August 2024. This increased production is being sold to China via Malaysia to avoid sanctions. Malaysia produces less than 350,000 barrels per day of oil but exports a massive 1.5 million barrels per day of oil to China.[4] It is Iranian oil, surreptitiously shipped to Malaysia, from where traders re-export it to Chinese oil refiners.
The revival in oil exports may be one reason why Iran has been relatively restrained – it stands to lose in a conflict. A hit on this financial lifeline may push Iran into a corner, pushing it to block oil production and trade in the Persian Gulf.
For India, which imports over 80% of its oil, such an escalation presents a problem. The price of the 1.4 billion barrels of oil that flow into India annually affects the economy. India is consumption-driven, and higher oil prices mean less money for domestic consumption. A $25 per barrel increase will mean an additional $35 billion, or 1% of India’s GDP to pay for energy. Much of India’s transport infrastructure runs on diesel, and higher oil prices translate to higher all-round inflation. Food prices are affected by high energy prices as natural gas is an input in urea manufacture. A major conflict in the Persian Gulf will have an even greater impact than the 2022 Ukraine conflict, which has already hit many developing countries hard.
An additional complication for India is that its South Asian neighbours, Bangladesh, Pakistan, Sri Lanka and Maldives, are all facing economic crises. These countries are more vulnerable than India to spikes in energy and food prices and conflict in West Asia will hit them harder and earlier than it will India. India stepped in with emergency assistance for Sri Lanka in 2022 and Maldives in 2024. Will Bangladesh be next? Economic hardship was one of the drivers of the recent regime change and the subsequent violence, and Dhaka’s financials are worse than before. A financial crisis can become a humanitarian crisis. Should Bangladesh look to India for a bailout, with a full-blown West Asian crisis, it may be a case of too big to bailout and too big to fail.
The best case scenario, therefore, is that the enlightened self-interest of the U.S., Israel and Iran prevail, keeping energy supplies safe.
Amit Bhandari is Senior Fellow for Energy, Investment and Connectivity, Gateway House.
This article was exclusively written for Gateway House: Indian Council on Global Relations. You can read more exclusive content here.
For permission to republish, please contact outreach@gatewayhouse.in.
Support our work here.
©Copyright 2024 Gateway House: Indian Council on Global Relations. All rights reserved. Any unauthorised copying or reproduction is strictly prohibited.
References
[1] ‘Biden and Netanyahu Speak as Israel Prepares Iran Response,’ Foundation of Defense of Democracies, https://www.fdd.org/analysis/2024/10/09/biden-and-netanyahu-speak-as-israel-prepares-iran-response/
[2] ‘‘Operation True Promise 2 shows small portion of Iran’s defense capabilities’,’ Islamic Republic News Agency, https://en.irna.ir/news/85615957/Operation-True-Promise-2-shows-small-portion-of-Iran-s-defense
[3] ‘An unbelievable reality,’ Prime Minister’s Office, Government of Israel, https://www.gov.il/en/pages/iranattackterrorattacktlv021024
[4] ‘Malaysia’s oil exports to China surge 12-fold as Iranian oil is rebranded,’ Iran International, https://www.iranintl.com/en/202408281415