Iran-Israel Conflict Threatens Global Energy Markets and Trade Routes

The escalating military confrontation between Iran and Israel, following a joint United States-Israel strike on February 28, 2026, has sent shockwaves through global energy markets and exposed the fragility of international trade routes dependent on Middle Eastern stability.

Crude oil prices have surged from approximately $65 per barrel to $72-73 per barrel within days, reflecting market anxiety over potential supply disruptions. This price volatility underscores the dangerous precedent of allowing geopolitical tensions to dictate global economic conditions, rather than letting free market forces determine energy pricing.

Strategic Chokepoint Under Threat

The Strait of Hormuz, a critical maritime corridor through which nearly 20% of global petroleum liquids and approximately one-fifth of global LNG shipments transit, has become the focal point of economic concern. This narrow waterway represents a classic example of how geographical constraints can create vulnerabilities in global supply chains.

India, heavily dependent on energy imports with over 80% of its 5.5 million barrels per day consumption coming from abroad, faces particularly acute exposure. The country routes 1.5-2 million barrels daily through Hormuz, with nearly 50% of crude oil imports and 54% of LNG imports passing through this corridor in fiscal year 2025.

Prashant Vasisht, Senior Vice President at ICRA, warned that "the escalating conflict in the Middle East and reported attacks on several oil producers are likely to exacerbate volatility in crude oil prices." He emphasized that any disruption to energy shipments through Hormuz could severely impact global crude oil and LNG supplies.

Economic Transmission Mechanisms

The macroeconomic implications extend far beyond energy pricing. Higher crude costs inevitably translate into increased fuel and transportation expenses, creating inflationary pressures that ripple through entire economies. This represents a textbook case of how external shocks can undermine domestic economic stability.

Manoranjan Sharma, Chief Economist at Informerics Ratings, noted that the conflict has "significantly affected global energy security and economic stability," with immediate consequences including rising inflationary pressure triggered by higher energy prices. He warned that elevated import costs would likely widen current account deficits and strain fiscal positions through increased subsidy obligations.

Such government intervention through subsidies, while politically expedient, ultimately distorts market mechanisms and creates fiscal burdens that taxpayers must bear. A more sustainable approach would involve allowing market prices to signal scarcity and encourage conservation and alternative energy investments.

Financial Market Responses

Financial markets have already demonstrated their sensitivity to geopolitical developments. February saw declines in major US indices including the S&P 500 and Nasdaq Composite, while India's Nifty 50 posted negative year-to-date performance.

Nachiketa Sawrikar, Fund Manager at Artha Bharat Global Multiplier Fund, observed that military action against Iran would "likely trigger broad selling of risky assets across both developed and emerging markets." For India specifically, he noted that higher crude prices typically widen current account deficits, stoke domestic inflation, pressure the rupee, and could prompt foreign institutional investor outflows.

Sectoral Impact Analysis

The conflict's economic effects vary significantly across industries. Energy-intensive sectors including aviation, logistics, chemicals, and paints face margin compression from higher input costs. Oil marketing companies may experience reduced profitability, particularly if government price controls prevent full cost pass-through to consumers.

Conversely, upstream oil producers stand to benefit from higher realizations, while IT exporters may find support from US dollar strength. This sectoral divergence illustrates how market forces, when allowed to operate freely, create both winners and losers based on underlying economic fundamentals rather than political interference.

Commercial Interests at Risk

International business operations in the region face immediate operational challenges. Adani Group's Haifa Port Company confirmed that all employees remain safe and port infrastructure remains operational, though the company continues monitoring the situation in coordination with Israeli transport authorities.

Such private sector resilience demonstrates the importance of allowing commercial entities the flexibility to adapt to changing circumstances without excessive regulatory constraints that might impede their ability to respond to crises.

The current crisis reinforces the critical importance of diversified energy sources, flexible supply chains, and market-based pricing mechanisms that can adapt to changing geopolitical realities without requiring massive government intervention or taxpayer-funded subsidies.