Government Urged to Review Energy Risk Scenarios Due to Escalating Iran-Israel Conflict

The ongoing conflict between Israel and Iran is escalating, prompting urgent action from the Indian government to reassess energy risk scenarios. The Global Trade Research Initiative (GTRI) highlighted the need for India to diversify its crude oil sources and ensure adequate strategic reserves. The war poses significant threats to India's energy security, trade routes, and commercial interests, according to GTRI.

Representative image

Ajay Srivastava, founder of GTRI, noted that India has substantial trade exposure to both Israel and Iran. In 2024-25, India exported goods worth USD 1.24 billion to Iran and imported USD 441.9 million. Trade with Israel was even larger, with exports reaching USD 2.15 billion and imports at USD 1.61 billion. However, India's reliance on West Asia for energy is more critical than these bilateral trade figures.

Energy Security Concerns

India depends heavily on the Strait of Hormuz for its energy needs, with nearly two-thirds of its crude oil and half of its LNG imports passing through this narrow waterway. Iran's threat to close the Strait could severely impact global oil trade, as it handles nearly a fifth of it. Any disruption here would likely lead to increased oil prices, shipping costs, and insurance premiums.

Srivastava explained that such disruptions would trigger inflation in India, put pressure on the rupee, and complicate fiscal management. The situation became more pressing when Iran launched missiles at Israel's Haifa port on June 15. This port handles over 30% of Israeli imports and is 70% owned by India's Adani Ports.

Impact on Trade Routes

The missile attack caused damage to port infrastructure and nearby refineries, raising concerns about disrupted logistics and potential spillover into Indian commercial operations. Additionally, Israel's strike on Houthi military leadership in Yemen has increased tensions in the Red Sea region, where Houthi forces have attacked commercial shipping.

This situation poses another risk for India as nearly 30% of its westbound exports travel through the Bab el-Mandeb Strait. If shipping routes are rerouted around the Cape of Good Hope due to conflicts, transit times could increase by up to two weeks, significantly raising costs.

Trade Implications

The rerouting would directly affect Indian exports of engineering goods, textiles, and chemicals while also increasing input costs for key imports. Despite not being a party to the conflict, India cannot afford complacency in addressing these challenges.

The government must act swiftly to review energy risk scenarios and diversify crude sourcing to mitigate potential impacts from this geopolitical tension. Ensuring sufficient strategic reserves is crucial for maintaining stability in India's energy supply chain amidst these uncertainties.

With inputs from PTI