The global economy would be affected by rising oil prices near $90. Further escalation of the conflict towards other Middle Eastern oil producers is concerning and requires careful monitoring, especially given the global economy’s ‘higher for longer’ interest rate scenario. The oil supply is unlikely to be threatened unless the issue expands to other nations in the region and becomes a proxy conflict between the US and Iran.
Any retaliation against Tehran might harm ships passing through the Strait of Hormuz, which Iran has threatened to close. This will increase worldwide shipping and insurance expenses and already rising oil prices.
Brent had crossed the $90 mark but then retreated. Now we can use the $90 number to be the threshold beyond which there is trouble for the world economy.
The global economy faces high inflation again as crude oil prices rise. If oil prices stay high, the US, India, China, and other major nations that import oil may see substantial import inflation.
When oil prices rise, the cost of production for various industries and energy costs for businesses and households also surge, driving inflation higher. High energy prices and new inflationary trends could undermine the efforts of central banks to bring inflation under control. This can see interest rates at an elevated level for a prolonged period.
What is the impact on the Indian economy?
India continues to enjoy relative macroeconomic stability at this moment but is vulnerable to one key risk – supply disruption in crude oil prices because of escalation in the war, resulting in a spike in crude oil prices.High crude oil prices hurt India impacting currency stability (making imports expensive), possibly worsening the government’s fiscal deficit (the government is likely to absorb higher prices by cutting excise duty), widening the CAD further impacting currency adversely and affecting the profit margins of sectors such as aviation, paints, tyres, and chemicals. All these implications could have a negative impact on economic growth in the short term, as high inflation and low profitability in various sectors would hit disposable incomes and discretionary spending.
The conflict is not affecting India’s trade with Israel immediately. Should the battle escalate, supply-side issues may arise. India’s 1.8% merchandise exports to Israel are mostly petroleum products. Israel imports $5.5–6 billion in refined hydrocarbons from India. India’s exports to Israel were $8.4 billion in FY23. India imports equipment, pearls, diamonds, and other precious and semi-precious stones from Israel. India imported $2.3 billion from Israel in 2023.
(The author, Shantanu Bhargava is Managing Director, Head of Discretionary Investment Services, Waterfield Advisors)
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