Israel-Iran conflict: War and oil could both flare out of control
Conflagration risk is high as Israel and Iran engage in a deadly slugfest. While the oil market has mostly stayed calm through West Asian tensions since 2023, this can spiral into a bigger and wider war. Watch out for crude oil price upshoots and geopolitical rumbles.
It was a forex crisis fuelled by a volatile mix of oil and war in West Asia that led India to open up its economy. Flare-ups of hostility in that region are less impactful today, but Israel’s Friday attack on Iran and push for regime change should make us sit up in alarm.
Within hours of Tel Aviv’s Operation Rising Lion, the global price of crude oil spiked. Accusing Tehran of making a dash for nukes, Israel targeted Iran’s military set-up and top leaders, apart from nuclear scientists, and some uranium enrichment sites. A day earlier, the International Atomic Energy Agency (IAEA) had held Tehran in breach of the Non-Proliferation Treaty. The US first said Israel’s action was unilateral, but the White House urged Iran’s regime to sign a deal with America, warning of worse strikes ahead.
Also Read: Javier Blas: An Israel-Iran war may not rattle the oil market
While Iran-US talks over a nuclear pact had been fractious, Tehran’s rhetoric and retaliation since Israel’s offensive show it’s ready for armed combat. While Israel’s ‘iron dome’ has fended off most Iranian drones and missiles, Israeli targets have been hit. As a tit-for-tat spiral ensues, last October’s hostilities look like a faint shadow of this flare-up. Should this war worsen, will Tehran target US military bases in the Gulf or disrupt oil supplies?
A choke-point is the Strait of Hormuz, through which a fifth of the world’s crude-oil supply and most of India’s is shipped. Global oil demand had flagged lately, even as Opec’s recent easing of output curbs signalled a market glut. With the Saudi-led cartel’s play for market share now likely to fail if hardening prices attract more US shale production, it may revert to a tight-supply stance.
How much dearer could oil get?
Also Read: Escalating Israel-Iran conflict to keep markets on boil in near term
On Friday, Brent crude gave up its initial gains to settle at around $74 per barrel. This is moderate, but a $100-plus scenario can’t be ruled out.
An Iranian oil depot and gas field were bombed. Iran’s oil output is only 1.7% of the world’s. But if others’ oil facilities are set ablaze or Hormuz is choked by Iran—risks that will soar if US forces join battle—all bets would be off. Sure, the market has mostly held steady since October 2023, when a terror strike by Iran-backed Hamas on Israel sparked the Gaza War, but the past may prove to be a poor prologue. An Iran pushed into a corner might strike hard at American interests or rush to rattle the nukes allegedly being built in deep underground cavities.
India’s dollar scarcity turned into history long ago. Barring an overall trade seize-up, only if a barrel of oil hits triple digits would our balance of payments become a worry. As for fuel-stoked inflation, high fuel taxes offer a buffer, given the scope for their reduction to soften retail prices. Yet, this comfort could combust. Mighty as the US-Israel alliance is, any use of force to snuff out a threat can backfire.
It is unclear if the offensive’s calculus took into account China’s quiet quest for influence across the region’s sectarian divide, let alone the ‘Gaza effect’ on popular Arab views of the Islamic Republic’s defiance of the US and Israel. Politically, Tehran’s regime cannot afford to back down. How costly this conflict will prove is marked by uncertainty—beyond the scope, i.e., of a probability estimate.
A climate-friendly shift away from hydrocarbons has been snail-paced both globally and at home, Indian imports are rising faster than any other major energy market’s, and domestic drilling has been of little aid. In effect, we have a big stake in West Asian stability. With oil above $100 back on the risk radar, the premium on peace has risen. Overpriced energy mustn’t get a chance to impede our dash for prosperity.
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