Wherever tensions arise in the world, there is bound to be an impact on crude oil prices. Its effect is especially visible on oil importing countries like India. Let's see what effect the Israeli-Palestinian war will have!

The Russia-Ukraine war rattled the world last year disrupting energy and food trade. That war has had a severe impact on global wheat supplies. At present the Israel-Hamas clashes affecting the supply of crude oil. The price of Brent crude oil in the international market has already increased around 7 percent since the start of the Israeli-Palestinian war on October 7. Crude oil price reached 90.98 dollars from 84.58 dollars per barrel (October 6 price).

War Causes Spike in Oil Prices:

Middle-East conflict will impact the prices of petrol and diesel in crude oil importing countries including India and its effect on the prices of other commodities. The rise in the oil prices and the temporary impact on the import and export of goods from Israel can lead to the Indian economy taking a deep hit, which might lead to the rise in prices of basic commodities in the country.

Finance Minister Nirmala Sitharaman said that the concerns regarding a spike in petrol and diesel prices are back in India in the midst of the Israel-Hamas war. She said that there are uncertainties in the global petrol market, and hinted at the prices going up soon.

Threats that Loom Over India:

India will be impacted in many serious ways if the Israel-Palestinian conflict drags on or explodes into a bigger war. The conflict could widen as Israel began ground raids inside the Gaza Strip. Israel's announcement marked a shift from an air war to ground operations to root out Hamas. Conflict has left a huge loss in less than two weeks. Iran is also about to enter the battlefield. The short-term impact of the war is already visible.

The major impact is on crude oil prices, which have surged nearly 7 percent since the war declaration. For India, if the crude oil price continues to rise, it could have a significant impact on some specific stocks and the broader economy. Companies that use crude oil as a raw material have fallen in the last few days. If the price continues to increase and touches the three-digit mark, it might impact the Indian economy in some ways, because of this unexpected jump in price.

How Crude Oil Prices Impacts the Economy:

India is a major importer of crude oil, and higher oil prices lead to an increase in the cost of oil imports. It can result in a trade deficit, as India has to spend more on oil imports, which can, in turn, put pressure on the country's current account balance.

An increase in oil prices will lead to higher fuel prices, which can trigger inflationary pressures, as we have seen in 2022. Transportation and production costs will increase due to rising fuel prices, which can lead to higher prices for goods and services across the economy, impacting consumers and businesses. We have been working hard to bring the inflation down or under control; another inflation spike will affect the economy adversely.

The Indian government often subsidizes fuel prices to shield consumers from the full impact of rising oil prices. If the crude oil prices remain at their elevated level for longer, the government may need to increase subsidies or absorb a portion of the price increase, leading to a higher fiscal deficit.

A significant increase in oil prices can put pressure on the Indian rupee, as we have seen in Financial Year 2023. Since India pays for oil imports in dollars, a higher oil import bill can lead to an increase in demand for dollars, potentially weakening the rupee against the dollar.

If Iran Supports Hamas..!:

The situation will change significantly if Iran, which is a major supporter of Hamas, joins the war. If that happens, it could lead to a spike in the crude oil prices which may lead to selling pressure in the market. However, experts opined that other OPEC countries, like Egypt and Saudi Arabia, do not support the Hamas movement. Therefore, OPEC nations would be careful of the oil prices and may not let it rise beyond 10 to 12 percent, which will keep the number below the three-digit mark.

Impact on Israel-India Trade:

Israel imports or buys around 5.5 - 6 billion dollars of refined petroleum products from India. In Financial Year 2023, Israel's total imports from India stood at 8.4 billion dollars. Indian companies exporting products to Israel may have to pay higher premiums and shipping costs, which will reduce their profitability. As of now, there has not been any significant jump in premium costs or shipping charges, but if the war intensifies, the premium charges might increase every week.

India also imports products like machinery, pearls, diamonds, and other precious and semi-precious stones from Israel. As per available data, in FY23, India's total imports were 2.3 billion dollars from Israel. If the conflict escalates, it could create supply-side problems. If the trade gets impacted in the future, rupee depreciation is a possibility.