The situation began with isolated airstrikes, however, these actions have now created a continuous reaction impact on oil prices, the global markets, as well as trade routes.

At the center of this crisis is one of the largest Energy Resources in the World- South Pars Field, which straddles the borders of both Iran & Qatar. South Pars Field is not only the largest Natural Gas Field in the world, but also the backbone of energy supply to both Europe and Asia, as well as the Middle East.

The Trigger: Airstrikes on the South Pars Infrastructure

The conflict escalated after reports surfaced about an Israeli Airstrike on the South Pars Gas Infrastructure. This was the first-time ever that Airstrikes were conducted against Energy Supply Targeting Projects rather than military targets only. Iran’s Response was swift and calculated as it retaliated to the airstrike on the South Pars Gas Infrastructure with attacks on key energy sites in Qatar, such as LNG Infrastructure, confirming that the use of Energy Warfare has officially now been added to the Conflicts Playbook between Iran and Israel.

In conjunction with this development, Former President of the USA Donald Trump warned publicly that the USA would “massively blow up” the South Pars Gas Field should Iran continue to attack Gas Supply/Transportation Sites throughout the region. 

At the same time, Gulf Countries, including but not limited to Saudi Arabia and United Arab Emirates, have informed of either attempts or successful strikes against their own energy infrastructure assets.

The conflict today is no longer between these two sovereign entities; it has now expanded into an interconnected conflict that will carry substantial effects globally, disrupting global supply chains throughout.

Global energy markets are in total panic mode

o Brent Crude Oil is currently selling for greater than $110 and as high as $115 a barrel.

o Natural Gas prices have risen 25 – 30% since the opening trades of this day.

o Natural Gas prices have more than doubled, in Europe, since the beginning of the hostilities.

The increase in the price of these energy sources is based on real fears of supply disruptions.

Additionally, the most significant supply disruption will come from the blockage of the Strait of Hormuz through which close to 20% of the world’s oil flows. Reports indicate that Iran is contemplating blocking the Strait of Hormuz through bridge tolls and/or blocking all shipping from this region.

If Iran does block the Strait of Hormuz, (via bridge tolls and/or blocking shipping) this will lead to immediate and disastrous consequences for the entire supply chain of oil including:

o Bottlenecks in the entire supply chain,

o Massive increases in the cost of shipping due to extreme risk to ship owners/shippers, difficulty in shipping product and/or loss of shipping containers,

o World-wide shortages of fuel.

The current crisis is now a worldwide crisis (not just regional) affecting the world-wide supply of energy.

Financial Markets Are Beginning To Collapse – A Chain Reaction Begins

The effects of this crisis are already beginning to be felt in the world’s financial markets.

Financial markets, particularly in Asia (Japan), are now experiencing significant losses as evidenced by the dramatic drop in their Nikkei, similarly in the European stock markets and now in the US stock market with rapidly accelerating inflationary pressures due to the quickly rising costs of fuel. Asia (particularly India), is also likely to experience dramatic declines in the value of their financial markets.The Indian stock market: 

• On the Nifty index, there was a decline of over 2000 points intraday.

• On the Sensex index there was a similar decline.

• On July 27th, there was a destruction of ₹12 trillion worth of market cap in just one day.

This fall in index prices does not simply show random volatility but a reflection of fear by investors created from continuous uncertainty and the rising costs of doing business.

The sectors most negatively affected are:

• Airline (increase in fuel costs)

• Logistics (rising transportation costs)

• Manufacturing (rise in input costs)

• Banking (market volatility + uncertainty in global markets)

What Makes This Conflict Unique

The recent increase in hostilities between Israel and Iran is different than any other conflict before it due to the fact that the energy sector has become a deliberate target

Historically, the disruption of energy production based in the Middle East has been avoided due to fear of damaging the economy globally. This fear may not be as heightened now as a result of the current hostilities.

In addition:

• This conflict is the first time when multiple countries will be observing the conflict from the sidelines

• Energy-related critical infrastructure located throughout the region and beyond has become vulnerable to destruction

• The nature of the conflict has disrupted trade, caused inflation and negatively affected all finance systems at once in the affected area’s countries

Therefore, this should be classified as less of a military conflict and more of a global systematic risk event.

Wait, What Does This Mean For India? 

Now the question becomes, how will this affect India?

1. Dependence On Crude Oil

India imports over 85% of its crude oil needs worldwide; this puts India in a very weak position due to the possibility of sudden increases in price worldwide.

With crude prices now above $110:

• The price of gasoline will increase;

• The amount of subsidy burden for the government will increase;

• Pressures will grow on India’s already high fiscal deficit.

As such, the price increase will be felt by every consumer, either directly or indirectly.

2. Inflation and the Cost of Living

The recent rise in oil prices has significant negative impacts on the economy that go well beyond the price of gas.

• Transportation costs increase

• Food prices increase based on logistics

• Manufacturing will become more expensive

The significant rise in prices of oil may force the Reserve Bank of India to reassess their interest rate policies as India’s inflation rises beyond reasonable levels.

3. Impact on the Indian Stock Market

If volatility continues, the ₹12 Trillion loss to the Indian Stock Market will only get worse.

Foreign Institutional Investors (FIIs):

• Will take their investments out of the Indian market

• Will invest in safer assets such as US Bonds

This increased volatility in the stock market will then lead to:

• A decrease in the value of the rupee

• Increased volatility in the Indian Stock Market

• A drop in investor confidence in the Indian Stock Market

4. Diplomatic and Strategic Tightrope

India has:

• A relationship with Iran (for energy and a connection to the Chabahar Port), 
• A relationship with Israel (for defense and technology)
• A relationship with Gulf nations (for oil and the Indian Diaspora).

This current conflict makes India’s position very delicate, in that aligning with either side of this conflict could damage these important relationships.

Therefore, India most likely will:

• Push for diplomatic de-escalation, 

• Ensure alternative sources of energy.

5. Trade Routes and Supply Chain Risks

If the Strait of Hormuz is interrupted:

• India’s oil imports will be impacted and delayed

• The cost of shipping will go up

• Exports and Imports will be delayed

Most severely impacted will be India’s:

• Pharmaceutical Exports

• Textile Exports

• Industries that rely upon their supply chains

So, where does that leave us? 

What we are experiencing is more than just a war; we are experiencing an entire restructuring of global risk.

Oil is being used as a weapon, trade routes are uncertain and markets are reacting to this crisis in real-time. 

And India, being so connected to the global economy, is experiencing the crossfire from the consequences.

Over the coming weeks, we will see volatility escalate; as this volatility passes, the world will face:

• Chronic High Inflation

• Slowed Economic Growth

• A protracted Energy Crisis

SIGH!