Oil Price Shock and Global Economic Fallout from US-Israel Attack on Iran
Following joint US-Israel strikes on Iran on February 28, 2026, and Iran's reported closure of the Strait of Hormuz, global oil markets entered crisis mode with prices threatening to breach the $100 per barrel mark.
Analysts and global investment banks including JP Morgan estimated that a full Strait of Hormuz blockade combined with escalating conflict could push international crude oil prices to $120-130 per barrel — more than 70% above the pre-conflict level of approximately $70 per barrel.
Iran's retaliation included strikes on 27 US military bases across the Middle East (Bahrain, Kuwait, Qatar, Iraq, Saudi Arabia, UAE, Jordan) — potentially destabilising Gulf oil producers.
Four Very Large Crude Carriers (VLCCs) were observed diverting away from the Strait of Hormuz following the strikes.
Higher energy costs triggered global inflation fears, with economists warning of recessionary pressures if the disruption is prolonged.
Strait of Hormuz: The Oil Market's Jugular Vein
The Strait of Hormuz is the single most critical oil chokepoint in the global energy system. Located between Iran (north) and Oman/UAE (south), it is approximately 33 km wide at its narrowest navigable point. It is the only sea route connecting Persian Gulf oil producers (Saudi Arabia, UAE, Kuwait, Iraq, Bahrain, Qatar) with the global market. Any closure or significant restriction of the Strait has immediate and severe consequences for global crude oil supply and prices.
Iran's reported closure of the Strait of Hormuz represents the most severe energy supply shock since the 1973 Arab Oil Embargo, with the potential to disrupt approximately one-third of global oil trade simultaneously.
Oil Price Transmission Mechanism: How Crude Shocks Ripple Through the Economy
Crude oil is the foundational input for a vast range of economic activities: transportation, manufacturing, fertilisers, plastics, and electricity generation. A sharp increase in crude prices transmits through multiple economic channels: directly raising fuel costs (petrol, diesel, aviation turbine fuel), indirectly raising prices of all goods and services that depend on energy for production or transport, and weakening currencies of oil-importing nations (as they need more dollars to buy oil).
If crude prices hit $120-130 per barrel as projected for a sustained Strait of Hormuz closure, India's oil import bill could increase by $60-90 billion annually — a potentially catastrophic fiscal and monetary shock.
Strategic Petroleum Reserves (SPR): Emergency Buffer Mechanism
Strategic Petroleum Reserves are government-held emergency stockpiles of crude oil maintained to cushion the economy against supply disruptions. The concept emerged after the 1973 Arab Oil Embargo. The International Energy Agency (IEA) — established in 1974 precisely in response to that crisis — requires member countries to maintain emergency reserves equivalent to at least 90 days of net oil imports.
With the Strait of Hormuz threatened, India's modest SPR holdings (~9-10 days of cover) highlight the country's vulnerability. A prolonged disruption would quickly exhaust emergency stocks, making diplomatic resolution or alternative supply sources critical.
India's Energy Security Architecture
India has progressively diversified its crude oil import sources after it stopped buying Iranian oil in 2019 under US sanctions pressure. Russia became India's single largest crude supplier in 2022-23, following sanctions-driven discounts on Russian Ural crude post the Ukraine war. India also imports from Iraq (its top supplier for most years), Saudi Arabia, UAE, and the US.
The Strait of Hormuz crisis could simultaneously disrupt supplies from Iraq, Saudi Arabia, and the UAE — India's three largest oil sources — creating an energy emergency that Russia and the US Atlantic coast cannot quickly compensate for by volume.
- Pre-crisis crude oil price: approximately $70 per barrel (Brent)
- Projected price with Strait closure: $100-130 per barrel (JP Morgan and other investment bank estimates)
- Strait of Hormuz daily oil flow (2025): more than 14 million barrels per day (~one-third of global seaborne crude)
- Strait of Hormuz LNG flow: approximately 20% of global LNG exports
- India's crude import bill FY24: approximately $180 billion (~25% of total imports)
- A $10/barrel crude price rise for India: +49 basis points CPI inflation, +43 basis points fiscal deficit widening, -0.25-0.27% GDP growth
- India's SPR capacity: approximately 5.33 million tonnes (~39 million barrels), covering ~9-10 days of consumption
- IEA 90-day emergency reserve standard (India is not an IEA full member; joined as association country in 2017)
- Iran's share of India's oil imports: zero since 2019 (US sanctions)
- Russia's share of India's crude imports (FY25): approximately 35%