Crude Oil: The barometer of global stability

Crude oil is often called the engine of the global economy—and for good reason. It fuels everything from cars and planes to power plants and factories.

Beyond its role as energy, it’s also a key input in countless industries—from plastics to pharmaceuticals—making it a vital cog in the machinery of modern life.

So, when oil prices rise, the ripple effects are far-reaching and hard to ignore.

Today, crude is hovering in the mid-$70s, with analysts watching closely as geopolitical tensions threaten to send it higher.

At a time when global growth is already navigating a fragile path, oil has become more than a commodity—it’s a barometer of economic health, global risks, and investor sentiment.

Why are crude prices rising?

At the heart of the current surge is the growing risk of geopolitical escalation in the Middle East—especially tensions involving Iran, Israel, and potentially the United States. Here’s how:

1. The strait of Hormuz: A narrow passage, a massive risk

The Strait of Hormuz, just 33 kilometres wide at its narrowest point, is one of the most important arteries of global oil trade. Roughly 20 million barrels of crude and refined products pass through it daily—about 30% of global oil flows.

If Iran were to block this chokepoint, even briefly, it could cripple supply routes and provoke a swift military response from the U.S. The threat of such escalation keeps markets on edge and prices elevated.

2. Direct strike on Iran’s oil infrastructure

Another looming risk is a potential attack on Iran’s oil export facilities—especially Kharg Island, which handles a major chunk of its exports. A successful strike here could take 1 to 1.5 million barrels per day off the market.

Experts suggest such a disruption could spike prices by $5 to $10 or more, depending on how long the supply remains offline. While not the base case, this is a tail risk the market cannot afford to ignore.

3. Shipping risk & soaring costs

Even without direct conflict, the mere threat of instability is enough to shake global logistics. With rising tensions, shipping companies are either steering clear of the region or demanding high-risk premiums.

This has led to reduced vessel availability, soaring freight and insurance costs, and an increasingly inefficient supply chain—all of which quietly push oil prices higher. In short, even uncertainty alone has a price.

What rising crude means for the Rupee

India imports about 85% of its crude oil needs, so any price hike has immediate consequences. A higher import bill widens the trade deficit, raises demand for U.S. dollars, and weakens the rupee.

And as the rupee depreciates, importing oil becomes even more expensive—fuelling a loop of imported inflation.

While petrol and diesel make up around 2.5% to 3% of India’s Consumer Price Index (CPI), the government often shields consumers from global price shocks by absorbing the hit. But that buffer comes at a cost.

Take this for instance: Back in June 2022, Brent crude was trading around $111 per barrel, and petrol prices in India were close to Rs 110 per litre. Fast forward to when crude slipped to nearly $60, fuel prices in India still hovered above Rs 100.

Why the mismatch? Excise duties. The government didn’t pass on the full benefit of lower global prices to consumers, using the margin to shore up revenues.

But now, with crude inching back up, the equation flips. To shield consumers from price shocks, the government may need to absorb some of the burden—possibly by trimming fuel taxes. The cost? Each ₹1/litre cut in excise duties translates into a revenue loss of about $1.5 billion, or roughly 0.06% of GDP, putting additional pressure on fiscal math.

Additionally, the government subsidizes fuels like LPG and kerosene. When crude prices rise, these subsidies become costlier to maintain, adding to the fiscal burden. India’s annual fuel subsidy bill has ranged from Rs 34,000 crore to Rs 53,000 crore in recent years.

Put together, rising crude prices mean:

• Higher import costs

• Larger fiscal and trade deficits

• Upward pressure on inflation

• A weaker rupee

All of which create a challenging environment for monetary and fiscal policy alike.

Global Impact: Big economies aren’t immune

Even economic giants like the U.S. and China can’t escape crude’s grip.

If oil prices continue to rise, the U.S. economy could start to feel the strain. Higher fuel and transportation costs may begin to pinch household budgets, potentially slowing consumer spending—one of the key drivers of growth.

At the same time, sticky energy prices could make the Federal Reserve’s fight against inflation even tougher. Should inflationary pressures persist, the Fed might be compelled to delay interest rate cuts, adding a layer of uncertainty to the broader economic outlook.

China, meanwhile, is playing it tactically. As the world’s largest crude importer, it has been stockpiling oil—bringing in more than it refines—to shield itself from future price spikes. This stockpiling gives Beijing flexibility to curb imports if prices soar further.

But it’s not all smooth sailing. Sluggish refinery activity points to tepid domestic demand, and high input costs continue to weigh on factory margins and export competitiveness.

Technical talk on crude

Crude prices broke out of a double bottom congestion zone earlier this week and have now tested the key resistance near $78.00. A sustained move above this level could pave the way for further upside, with resistance levels lined up at $80.00, $84.00, $88.00, and eventually $95.00.

On the downside, key support is clustered between $68.00 and $65.00. A break below this zone could signal a shift in momentum and revive bearish pressure.

All Eyes on the barrel, all hopes on peace

At this point, crude oil has once again become the world’s most watched pressure point. From India’s stretched import bill to China’s silent stockpiling, the ripple effects are everywhere.

As war clouds gather and tankers tread cautiously, oil prices are no longer just numbers—they’re signals. Signals of strain, of volatility, of what might come next.

For now, markets wait, policymakers juggle, and the world watches the barrel like a barometer—hoping it doesn’t tip too far, too fast.

(The author, Amit Pabari is MD, CR Forex Advisors)

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of the Economic Times)