With the United States bombing three major nuclear facilities in Iran, the geopolitical situation in West Asia has taken a turn for the worse, plunging the world into more uncertainty. Iran’s foreign minister Abbas Araghchi has warned the US that the strikes will have consequences and that Tehran “reserves all options to defend its sovereignty, interest, and people”. As of now, there are no signs of an early de-escalation; the military warfare continued into Monday with Israel striking six Iranian airports and explosions reported across Jerusalem following missile fire from Iran. Indeed, given the high-stakes conflict that it has now become, experts believe the crisis is part of a larger, global struggle and not merely a strife in the region. The escalating hostilities have put the security of the US and its allies in jeopardy. The manner and magnitude of the Iranian regime’s response, amidst fresh attacks reported on its nuclear sites, will of course be closely watched. Experts say Iran knows it would be vulnerable to more attacks if it targets US assets in the region and believe the country doesn’t have too many options. At this point, no one is sure whether the current regime will fall and if so, whether the new regime will vote for a peaceful end to the war.
Indeed, there are simply too many unknowns at this point. What’s certain though is that the crisis is sure to disrupt global trade and business at a time when the world economy is not exactly in the pink of health. The full repercussions of the US airstrikes are awaited but the impact is being felt on the ground, especially on prices of crude oil. Crude oil prices soared over the weekend and touched a near six-month high crossing $81 per barrel on Monday; they have climbed more than 20% since end-May. Although prices retreated to levels of $77/barrel, the nervousness in the markets was palpable.
West Asia accounts for about a third of global crude oil production. Although the chances of the Strait of Hormuz being closed for business for a prolonged period are small, the channel could be out of bounds for a short period. That would most certainly throw supplies out of gear and result in a spike in crude oil prices given that approximately 27% and 20% of the world’s oil and liquefied natural gas (LNG) respectively are transported via this channel. Despite reductions in recent times, 38% of India’s oil imports and 52% of its LNG imports in 2024 were brought in via the Hormuz.
Higher oil prices will push up India’s import bill and impact the current account deficit. Meanwhile, Indian exporters are working to re-route shipments via the Cape of Good Hope, which will add three weeks to delivery timelines and drive up freight costs. Stock and bond markets across the world have been rattled by the events of the weekend and not surprisingly, the dollar has been gaining on safe haven demand. Most currencies across the globe lost ground against the greenback on Monday. In India too, bonds sold off while the rupee depreciated against the dollar. Coming as it does at a time when the world is in the midst of a global tariff crisis, the West Asia conflict will hamper growth and leave the environment more challenging. A speedy resolution, elusive as it appears, is what most nations will be praying for.