WEST ASIA CRISIS AND ITS IMPACT ON GLOBAL TRADE AND ECONOMY

 

What Sparked the Conflict in West Asia?

On February 28, 2026, the U.S. and Israeli forces joined hands in order to target Iran’s nuclear and ballistic missile capabilities with the aim of neutralizing it. This air strike was known as ‘Operation Epic Fury’. In retaliation, Iran targeted Israel’s bases and allied countries of the U.S. in the Arab world where the U.S. has its military, air force and naval bases. The situation drastically escalated when Iran's Supreme Leader Ayatollah Khamenei was killed in a deadly strike in response to stalled negotiations regarding Iran’s alleged nuclear program. 

What is Iran’s ‘Mjolnir’?

Iran possesses significant military, legal and geographic control over the Strait of Hormuz. The Strait of Hormuz is responsible for 25–30% of the global oil supply and consumption, i.e., it supplies ~21 million barrels of oil per day. This major chokepoint handles almost the entirety of Qatar’s LNG supplies along with major exports from Saudi Arabia, UAE, Kuwait, Iraq and of course Iran. 

Apart from oil, the Strait of Hormuz also handles fertilizers (~30% of global fertilizer trade), especially urea and ammonia that accounts for roughly 30%–35% of global urea exports and 20%–30% of global ammonia exports. 

In addition to the above, the Strait is also responsible for supplying half of the world's seaborne sulphur, one-third of the world’s seaborne methanol, and a significant share of helium, aluminium, food and agricultural products, and general goods and consumer products. 

Therefore, with 25–30% of the world oil supplies, 20–25% of the global gas supplies, and ~30% of global fertilizer supplies, the Strait of Hormuz becomes the most critical chokepoint in the global supply chain, thereby giving Iran the ability to exert significant influence and a bargaining power at the negotiating table.

How did Iran create a domino effect on the global economy and supply chain with its Mjolnir?

Iran was well aware of the weightage Strait of Hormuz carries and the power it possesses over its control. Iran, whose armed forces were of no-match to the U.S. and Israel’s military, soon outgunned the U.S. and Israel by extracting leverage from the economic benefit they held. Iran also knew how the blockage of the Strait of Hormuz will lead to a massive spike in the oil prices all over the world, in turn impacting the fuel prices and creating a domino effect on retail inflation. So, in order to get back at the U.S., Israel and their allies, Iran exercised its power to strategically cut off the lifeline and disrupt the global supply chain. In a statement, Iran’s foreign minister Abbas Araghchi said “Iran has an upper hand to decide which countries’ ships will pass through the Strait of Hormuz”. 

Thus, on 2nd March, 2026, Iran went against the laws of the international waters and closed all forms of operations in the Strait of Hormuz, enforced by the Islamic Revolutionary Guard Corps (IRGC). IRGC threatened merchant vessels (MVs) using sea mines and naval actions. During this period, they allowed the MVs of countries who didn’t support the war to pass through the Strait, i.e., India, Pakistan, Türkiye, and China, while blocking the vessels belonging to the U.S., Israel, and their allies. The vessels that were allowed to pass through the Strait were under IRGC surveillance until they exited the Strait into the Arabian Sea. 

While the Strait of Hormuz accounts for about 25–30% of the world’s global oil supply, the impact, as a fallout of the chokepoint being closed, on the global crude oil prices was quite significant. Just ~1 million barrels per day of oil flowed through the Strait during the period of it being closed. This dried up the supply of the remaining ~20 million barrels per day of oil handled on this route. As a result, the oil import dependent nations, especially those procuring a sizeable basket from the Strait of Hormuz route, scrambled to secure their supplies from other global suppliers outside the Middle-East region. This Geopolitical situation not only pushed up the global oil prices, but also disrupted the global supply chain that increased the economic cost of operations for the countries, thus leading to cost-push inflation globally. In other words, the disruption in the global supply chain has tied the usage of every single process in it to oil – directly or indirectly i.e., the domino effect, and therefore, the supply of oil becomes the most critical component in the global supply chain ecosystem. 

Adding to the woes, in March 2026, Iran attacked and destroyed Qatar’s Ras Laffan Industrial Complex LNG Terminal – the largest LNG export facility in the world accounting for about 20% of the global LNG supplies. The LNG trains and GTL plant are expected to take 3–5 years for its repairs, thus impacting the LNG supplies for a considerable period of time. 

However, with the improvement in the flow/supplies of oil through the Strait of Hormuz, in the present scenario, to about 15 million barrels per day, crude oil prices have eased a bit from a high of ~$120 per barrel in early April 2026 to about $95 per barrel as of June 4, 2026 (prices of Brent Crude).

West Asia War - Impact on Indian Economy? 

India imports more than 30% of its crude oil imports, 70% of its LNG consumption and 90% of its LPG imports from the Strait of Hormuz. This, in itself, tells the scale of impact that the Indian economy had to brace with the supply chain in the Strait being disrupted. The inventory for oil (including strategic reserves) lasts for almost 2.5 months, the inventory for LPG (including strategic reserves) lasts for almost a month, and the inventory for LNG (including strategic reserves) lasts for about a fortnight (14–15 days). The blockage of this strait has pushed India to diversify its supply, on an emergency basis, by importing from almost 40 other suppliers globally, bypassing the Strait of Hormuz and bringing in ~70% of oil from conflict-free zones. This had a manifold impact on India’s supply chain and economy:

1.  India had to procure oil at a higher price due to the leverage it lost as a result of the Strait being closed;
2. The cost of freight significantly increased because now sourcing oil inventories from other suppliers across the globe has led to longer shipping routes and the resultant higher transit cost;
3. The average delivery time, depending on the suppliers’ nation, would take anywhere between 20–50 days as opposed to the earlier 2–4 days when the oil cargoes were shipped through the Strait;
4. In order to ensure that the oil and gas inventory levels don’t deplete below the threshold level, India had to scramble to secure supplies outside the Strait, and, in the process, lost its bargaining power for procurement;
5. As a result, the high oil prices together with higher freight cost had a double-whammy impact on the oil prices in India; and
6. The above led to a domino effect on the non-oil sectors, thereby leading to an overall cost-push inflation

Impact on Balance of Payments:

As mentioned in the previous section, the double-whammy impact on oil prices means that India would now have to pay more dollars to purchase crude oil. This increases the expenditure in comparison to the receipts, thus creating a deficit in the current account. In addition to this, a lot of election campaigning measures, like distributing freebies, were carried out during the April 2026 state elections in India. This further worsened the fiscal deficit, and, as a result, the current account deficit also increased. This increase in current account deficit leads to currency depreciation, i.e., weakening of the rupee against the U.S. dollar. That is because the deficit needs to be financed, and it will be done by external commercial borrowings (ECBs). Depreciation of rupee results in cheaper exports and expensive imports, which means it would further increase the cost for India to import crude oil, or for that matter any other goods/services. 

What is the Mitigation Strategy Adopted by Countries Worldwide?

The West Asia war has forced nations to seriously consider building oil routes bypassing the Strait of Hormuz so that any future conflict in the region may not impact the global supply chain to the scale it has currently impacted. While alternative routes bypassing the Strait exist - the East-West pipeline across Saudi Arabia that ships through the Red Sea and the Abu Dhabi Crude Oil Pipeline that ships through the Gulf of Oman – they allow for limited mitigation with a supply of ~5 million barrels per day and can’t be used as a replacement for the Strait.

To Summarize:

At the moment, the smartest thing for India would be to aggressively make investments in upstream (from discovery to exploration & production) and midstream (transportation via shipping or pipelines to refineries) assets, long-term reliable oil & gas suppliers and protection against forex fluctuations. The Strait of Hormuz blockage imparts a very important lesson to India of ‘not putting all your eggs in one basket’. The heavy reliance of India on this Strait for its oil & gas requirements led to a significant economic impact. It is, therefore, important for India to have reliable and long-term partners from other parts of the world, for oil & gas supplies, in addition to the Middle east partners. This will ensure guaranteed volume supplies at a pre-agreed price range and provide downside protection from vagaries in the oil sector. 

Moreover, it is also important for India to ramp up their current inventory levels and Strategic Petroleum Reserve (SPRs) so that during moments of unfathomable crisis, the nation manages to sail through by using some of these SPRs as the last straw before replenishing the stock again. Lastly, India should work towards enabling penetration of Piped Natural Gas (PNG) to households (urban and rural) and commercial establishments because it is not crude oil dependent and can be produced domestically in large volumes.

 

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