As Middle East conflict rages on, facing down the spectre of energy crisis

The ongoing conflict in the Middle East has caused significant dislocation in energy markets, and sharp price gyrations. On Monday, Brent crude oil surged to nearly $120 per barrel. Prices softened thereafter, with reports suggesting discussions between the G7 countries over the release of oil from their strategic reserves (the group is yet to take a decision on the matter) and US President Donald Trump’s comments that the war could come to an end “very soon”. Crude is currently hovering around $87 per barrel. The dislocation can also be seen in the gas markets, where prices have surged as roughly a fifth of global LNG flows through the Strait of Hormuz. As much of India’s gas imports — the country imports around 50 per cent of its total natural gas requirements and over 60 per cent of its LPG demand — are also from this region, the demand-supply mismatches are now showing.

As per a report in this paper, shortages are affecting industrial users of LNG and LPG, be it tile and ceramic makers in Gujarat, or commercial users of cooking gas such as restaurants in cities like Bengaluru and Mumbai. The government has moved quickly. It has invoked the Essential Commodities Act to ensure supply of natural gas to priority sectors. The top priority has been given to piped natural gas for household consumption, compressed natural gas for transport and LPG production — segments that directly impact millions of households. The second category is fertiliser units (they will receive 70 per cent of their average consumption of the last six months), followed by tea industries, manufacturing and other industrial consumers, and commercial and industrial consumers of gas distribution companies.

There is little clarity on how soon this conflict will come to an end. India’s heavy dependence on the Gulf region for meeting its energy requirements increases its vulnerability. The costs imposed by higher energy prices will have to be borne. An extended conflict and closure of the Strait of Hormuz will have implications for inflation, the growth momentum and twin deficits. The ripple effects of the conflict are also being felt in other segments of the economy. This situation requires deft economic management. The government must carefully navigate this challenging period as it tries to absorb and balance multiple pulls and pressures.