Global oil prices have remained elevated due to US-Israel’s war on Iran since February 28. Although the conflict has been punctuated by recurring ceasefire episodes, Brent spot prices averaged $98 a barrel in March-August 2026, up 41% from March-August 2025. They subsequently gathered momentum hitting $109 a barrel earlier this week and easing slightly thereafter as the war has entered a dangerous phase following fresh strikes by Iran-backed Yemeni Houthi forces on Saudi Arabia, the largest oil producer in the region, and attacks on ships in the Strait of Hormuz, through which a fifth of global oil supplies pass. A drone attack forced Saudi Arabia to shut down its East-West Pipeline linking its eastern oilfields to the Red Sea port of Yanbu for supplying to Europe and Asia. Fuel shocks don’t augur well for highly energy-import dependent countries like India and the world economy.
Global oil prices are bound to remain on the boil due to the intensifying hostilities in West Asia and the fact that alternative routes to ship out oil are shutting down. The closure of the Strait of Hormuz itself is enough to keep prices high as only a few tankers can navigate it, escorted by the US Navy. Unfortunately, this state of affairs will persist as a high-level meeting on Monday between Iran and the Gulf Cooperation Council to discuss opening up shipping in the Strait has been indefinitely postponed. The bad news is that prices will definitely boil over because another maritime chokepoint is likely to develop as Houthi forces rapidly advance to control the Bab el-Mandeb Strait in the Red Sea, through which 4-5% of global oil supplies passed in recent months. Two chokepoints are enough to send prices through the roof.
Saudi Arabia’s travails — which include no support from the US or its Mecca joint defence agreement partners — exemplify these developments. The kingdom initially sought to re-route its supplies from the closed Strait of Hormuz through its East-West pipeline. From Yanbu, oil was taken on tankers south through the Bab el-Mandeb Strait. But this route is closing after Houthi forces declared a blockade on shipping linked to Saudi Arabia and attacked its tankers. In the past week, only two Saudi cargoes passed through this Strait out of the Red Sea. Houthi forces control strategic Red Sea ports like Mokha in Yemen and Perim Island in the Bab el-Mandeb Strait. With Iran and its proxies now controlling two main routes for shipping, the Saudis have no option but to send oil north through the Suez Canal that is longer and costlier for its exports.
Costlier oil due to the closure of Saudi’s pipeline and conflict will widen India’s trade deficit and push up domestic prices. As energy imports have to be paid for in US dollars, this would result in further downward pressures on the rupee. Although the bullish Q1 GDP growth numbers in FY27 suggested the economy was resilient in the face of supply-side shocks, elevated Brent prices for a prolonged period — with the Indian crude basket near $130 a barrel this month — will force painful policy choices. There is no alternative to increasing relative self-sufficiency by boosting domestic production over the medium term to cope with energy shocks. It is a strategic necessity to reverse the steady downtrend in domestic production by stepping up exploration and production with the help of global majors.