The escalation of hostilities between Israel and Iran has brought West Asia back to the centre of global economic anxiety. While the immediate headlines focus on missiles, retaliation, and geopolitics, the deeper and more enduring impact of this conflict may be felt far beyond the battlefield - in global trade flows, energy markets, inflation trajectories, and maritime security. For a world economy already strained by fragmentation, protectionism, and slowing growth, this conflict threatens to become yet another systemic shock.
At the heart of global concern lies oil and trade. West Asia is not merely a geopolitical flashpoint; it is the connective tissue of global commerce. Nearly one-fifth of the world's oil trade and a substantial share of liquefied natural gas (LNG) shipments pass through the Strait of Hormuz. Any sustained disruption - whether through direct military action, proxy attacks, or heightened insurance and security costs, will have an immediate knock-on effect across supply chains. Even without a complete closure of shipping lanes, uncertainty alone raises freight rates, delays deliveries, and forces rerouting, adding time and cost to global trade.
The experience of recent years should make this worryingly familiar. From the pandemic to the Ukraine conflict and Red Sea disruptions, global trade has become increasingly vulnerable to geopolitical shocks. The Israel-Iran conflict adds another layer of risk, particularly because it sits astride the world's most critical energy corridor. Unlike earlier disruptions that were to some extent regionally contained, this conflict has the potential to simultaneously affect energy supply, maritime logistics, and investor confidence - an unusually toxic combination.
Oil markets will be, perhaps, the most immediate casualty. Even though the conflict escalated only 48 hours ago, it has already triggered volatility in crude prices, reflecting fears of supply disruption rather than actual shortages. History suggests that markets price in risk faster than reality. A prolonged conflict could push oil prices significantly higher, not because production collapses overnight, but because risk premiums rise across futures markets, shipping insurance spikes, and strategic stockpiling intensifies. For oil-importing economies like India, this acts as an inflationary tax, one that governments can neither easily predict nor control.
Energy costs ripple through transport, manufacturing, fertilisers, and feed directly into inflation prices. For developing economies, the consequences are harsher: weaker currencies, widening current account deficits, and shrinking fiscal space. In effect, geopolitical conflict in West Asia risks exporting inflation to the rest of the world.
For India, these risks are particularly acute. India imports over 85% of its crude oil requirement, making it highly sensitive to price shocks. While diversification of suppliers and increased purchases from Russia have provided some insulation, India is very susceptible to price volatility. A USD 10-15 increase in crude prices can materially alter India's inflation outlook and complicate macroeconomic management.
Yet oil is only part of India's vulnerability. Approximately 95% of India's trade by volume and around 70% by value moves by sea. If maritime trade routes in and around West Asia become riskier or costlier, India's exports, from engineering goods and chemicals to textiles and electronics, will face immediate pressure. Higher freight costs could erode competitiveness, delivery delays will certainly impact contracts, and insurance premiums could eat into margins. For small and medium exporters, already operating on thin buffers, such shocks could be existential.
There is also a strategic dimension. India's western ports are deeply integrated with trade routes passing through the Arabian Sea and the Gulf. Any instability in these waters could affect not just energy imports but also India's broader trade with Europe, Africa, and the Americas. In an era where 'friend-shoring' and resilient supply chains are becoming policy priorities, maritime insecurity undermines the very logic of dependable trade corridors.
Globally, the broader concern is that the Israel-Iran conflict accelerates the fragmentation of the world economy. As trade becomes riskier and energy more expensive, countries may turn inward and become protectionist - subsidising domestic producers and erecting new trade barriers. The cumulative effect will be slower growth, higher inflation, and diminished trust in global markets. What is even more worrying is that this may not necessarily be a temporary phenomenon but could portend a structural drift toward a less efficient, more volatile global economy.
What, then, can be done? Diplomatically, de-escalation must remain the overriding priority - not just for peace, but for economic stability. Economically, countries like India must continue to diversify energy sources, expand strategic reserves, and invest in resilient logistics and port infrastructure. Over the medium term, reducing oil intensity through energy transition is not merely a climate imperative; it is becoming a geopolitical necessity.
The Israel-Iran conflict is a reminder that conflicts today do not remain local; they travel through oil prices, shipping lanes, and inflation indices. Beyond its human and territorial toll, this conflict risks imposing a lasting economic burden - through higher oil prices, disrupted trade flows, elevated inflation, and slower growth. Treating geopolitics and economics as separate spheres would be a costly error.
(The author is President, Chintan Research Foundation, and former Director of the World Trade Organization)
Disclaimer: These are the personal opinions of the author
