Crude oil prices have jumped over 27% in June 2025 following Israeli strikes on Iranian energy sites. While global supply remains intact, markets are reacting to escalating geopolitical risks in West Asia. This article explores the economic impact on India—ranging from inflation and rupee pressure to strategic energy responses—and outlines scenarios that could push prices beyond $120 per barrel.
The global energy market is navigating significant turbulence following Israel’s military strikes on Iran’s critical energy infrastructure in June 2025. Targeting key sites such as the South Pars gas field, Tehran refinery, offshore platforms, and fuel depots, these attacks have significantly escalated the region’s conflict. As a result, Brent crude oil prices have climbed from $55.27 per barrel on May 5, 2025, to $70.45 by June 16, 2025, according to market data. This escalation, the most significant since the Russia-Ukraine conflict in 2022, has heightened economic uncertainty worldwide.
For India, the world’s third-largest oil importer, this price surge poses some notable challenges.
Crude Oil Price Surge: Market Dynamics
The rise in Brent crude prices reflects heightened geopolitical risk in West Asia. Iran, a key OPEC member, produces approximately 3.3 million barrels per day (bpd), exporting over 2 million bpd as crude and refined products. The strikes have sparked fears of supply disruptions, particularly given Iran’s strategic control over the Strait of Hormuz, a vital chokepoint for 18-19 million bpd—nearly one-fifth of global oil consumption. Trading activity on the Intercontinental Exchange (ICE) has intensified, with open interest in Brent contracts up 15% since early May 2025. Speculative positions have surged by 25%, per Commodity Futures Trading Commission (CFTC) data, as hedge funds bet on further volatility. This market environment increases risks for energy-importing nations like India, where oil accounts for 85% of the energy import bill.
Economic Challenges for India
India’s dependence on imported oil heightens its vulnerability to rising prices. Approximately 65% of its crude oil imports and 50% of its liquefied natural gas (LNG) cargoes pass through the Strait of Hormuz, per the Global Trade Research Initiative. The higher prices have raised India’s annual oil import bill by an estimated $26 billion, based on imports of 4.7 million bpd and a $15.18 per barrel increase.
Inflationary Pressures
Higher crude prices drive up fuel costs, impacting transportation and logistics. Retail prices for petrol and diesel may rise by 8-10%, based on historical pass-through rates, increasing costs for essential goods. This could elevate Consumer Price Index (CPI) inflation by 0.8-1.2 percentage points, straining household budgets and curbing discretionary spending in a post-pandemic recovery phase.
Currency and Trade Balance
The increased import bill pressures the Indian rupee, which has depreciated by 2.5% against the US dollar since May 2025. A weaker rupee raises the cost of oil imports, potentially widening the current account deficit (CAD) from 1.5% of GDP in FY25 to 2.2% if prices stabilize around $70-75 per barrel. This also increases the cost of servicing India’s $650 billion external debt as of March 2025.
Fiscal Constraints
To shield consumers, the government may expand subsidies on petrol, diesel, and LPG, potentially pushing the fiscal deficit beyond the targeted 4.9% of GDP for FY26. This could limit funding for infrastructure and social programs. The Reserve Bank of India (RBI) must balance its growth-supportive monetary stance with the risk of inflation breaching the 4% ± 2% target range.
India’s Policy Responses: Strategic Mitigation
India has adopted a comprehensive approach to manage the economic impact of rising oil prices, focusing on supply security, cost stabilization, and long-term energy independence.
Strategic Petroleum Reserves
India’s Strategic Petroleum Reserve (SPR), with a capacity of 5.33 million metric tonnes (approximately 39 million barrels), offers a 10-day buffer at current consumption levels. Expansion plans for an additional 6.5 million metric tonnes by 2028, with new facilities in Odisha and Karnataka, are progressing. Releasing SPR stocks could help stabilize domestic fuel prices during supply disruptions.
Diversifying Import Sources
To reduce reliance on West Asian oil, India has increased imports from Russia to 40% of its total in 2024, up from 25% in 2022, capitalizing on discounted supplies. Negotiations with African nations like Nigeria and Angola aim to secure additional sources, mitigating risks from potential Iranian supply interruptions.
Advancing Renewable Energy
India’s long-term strategy prioritizes renewable energy to curb oil dependency. The National Solar Mission and Green Hydrogen Policy target 500 GW of non-fossil fuel capacity by 2030. In 2025, solar and wind account for 12% of India’s electricity mix, up from 9% in 2022. Investments in green energy and electric vehicle infrastructure could reduce oil demand, particularly in transportation, which consumes 60% of India’s oil.
Fiscal and Monetary Coordination
The RBI and Ministry of Finance are working together to manage inflation and currency pressures. The RBI may utilize its $680 billion foreign exchange reserves to stabilize the rupee, while targeted fuel subsidies and excise duty reductions could alleviate consumer burdens without derailing fiscal consolidation.
Scenarios for Crude Prices Above $120: Drivers and Correlations
Further escalation of the Israel-Iran conflict could drive crude oil prices beyond $120 per barrel. Key factors and their correlational drivers include:
Sustained Iranian Supply Disruption
A prolonged halt in Iran’s 2 million bpd exports, due to infrastructure damage or retaliatory actions, would strain global supply. OPEC+’s spare capacity of 2.5 million bpd, primarily from Saudi Arabia and the UAE, may not suffice if other regional producers are affected. Correlation: A 2% reduction in global supply typically drives a 15-20% price increase, per International Energy Agency (IEA) models.
Strait of Hormuz Disruption
A partial or full blockade of the Strait of Hormuz would disrupt 18-19 million bpd of oil and LNG flows. While Iran’s reliance on the strait makes a full closure unlikely, temporary disruptions, such as mine-laying or tanker attacks, could spike insurance premiums and freight costs, pushing prices toward $130-150 per barrel. Correlation: A 50% rise in tanker insurance rates, as seen in 2019 Gulf attacks, correlates with a 10-15% price surge.
Regional Escalation
If the conflict spreads to Saudi Arabia or Iraq, which produce 15 million bpd combined, the supply shock could be severe. Damage to facilities like Saudi Arabia’s Abqaiq plant could remove 5-7 million bpd temporarily. Correlation: A 30% rise in the Geopolitical Risk Index (GPR), as during the 2019 Saudi attacks, correlates with a 20% price spike.
Speculative Market Activity
Hedge funds and algorithmic traders amplify volatility by betting on worst-case scenarios. Speculative long positions in Brent futures rose 25% in May-June 2025, per CFTC data. Sustained fear of disruptions could drive prices higher, even without physical shortages. Correlation: A 10% increase in speculative positions typically correlates with a 5-8% price rise, per Bloomberg Analytics.
Implications for India
Should prices exceed $120 per barrel, India’s CAD could widen to 3.5% of GDP, and inflation may reach 7-8%, prompting the RBI to raise interest rates by 50-100 basis points. Fuel subsidies could push the fiscal deficit to 6% of GDP, limiting public investment. Industries such as aviation, chemicals, and logistics would face cost pressures, while exporters using the Bab el-Mandeb Strait would incur higher shipping costs.
Global Economic Implications
Globally, oil prices above $120 would intensify inflation in energy-importing economies like the Eurozone and Japan, potentially leading to tighter monetary policies and slower growth. Developing nations with limited fiscal buffers may face debt distress, while energy exporters like Saudi Arabia and Russia could see windfall revenues, reshaping OPEC+ dynamics.
Navigating a Volatile Landscape
The tensions in West Asia, marked by rising crude prices, underscore the fragility of global energy markets. For India, the economic challenges are significant, but strategic measures—leveraging reserves, diversifying imports, and advancing renewable energy—offer a path to resilience. Should prices breach $120, coordinated fiscal and monetary policies, alongside global energy diplomacy, will be essential to maintain stability. India’s proactive approach will shape its ability to weather this uncertainty and sustain economic progress.