Why are oil prices rising amid Iran-Israel war? Pg10

Context:

• Escalating conflict between Iran and Israel has triggered a sharp rise in global crude oil prices, stoking fears of supply disruption, especially through the vital Strait of Hormuz.

Key Highlights:

• Brent crude rose nearly 9% on June 13 to $75.65/barrel, touching an intraday high of $78.50/barrel – a five-month high.
• Prices slightly moderated to $74.98/barrel by June 17, amid reports of diplomatic backchannel efforts.
• The key concern is Iran’s threat to close the Strait of Hormuz, a vital oil supply route.
• India, which imports over 80% of its oil, is vulnerable to any sharp price escalation.
• Though India does not import oil from Iran due to U.S. sanctions, it remains exposed to global price volatility.
• Ratings agency ICRA noted that current prices are manageable, but sustained rises could impact GDP growth and private investment.

Detailed Insights:

1. Why are prices rising?

• The Strait of Hormuz is a strategic chokepoint between the Persian Gulf and Arabian Sea.
• Around 20 million barrels/day of crude oil pass through it – nearly 20% of global petroleum liquids.
• Closure or threats of disruption increase insurance, shipping costs, and delivery delays, causing global prices to rise.
• 83–84% of oil and LNG moving through the strait is destined for Asia, including India, China, Japan, and South Korea.
• A blocked strait may also affect access to the Suez Canal and Red Sea, raising costs for Indian exports.

2. Can the world manage this uncertainty?

• The International Energy Agency (IEA) forecasted a well-supplied market in 2025, barring major disruptions.
• Global oil demand projected to rise by 720 kb/d, while supply may increase by 1.8 mb/d to 104.9 mb/d.
• However, recent developments have heightened geopolitical risks.

3. How is India affected and prepared?

• India imports over 80% of its crude oil.
• Direct imports from Iran are negligible due to U.S. sanctions.
• However, any global price increase directly impacts India's import bill and inflation.
• ICRA Chief Economist noted the current price surge is not yet alarming but continued uncertainty may reduce GDP growth and delay private investment.
• India has diversified its crude oil sources beyond the Gulf – including Russia, U.S., Africa, and Latin America.
• India must further accelerate diversification, invest in strategic petroleum reserves, and promote renewable energy to reduce such external vulnerabilities.

Key Concepts Involved:

• Brent Crude: A global oil benchmark used to price two-thirds of the world’s traded crude.
• Strait of Hormuz: A narrow waterway through which ~20% of the world’s petroleum passes; a major energy chokepoint.
• Chokepoints: Strategic narrow passages in global shipping routes vulnerable to political or military disruptions.