Iran war: Lessons from past oil shocks India can use

The 1990 Gulf crisis

Another major oil crisis occurred in 1990 with the onset of the Gulf war. Following the Iraqi invasion of Kuwait in 1990, a US-led coalition of over 30 countries launched ‘Operation Desert Storm’.

Even before the war, tensions between Iraq and Kuwait had strained oil supplies, and the outbreak of the war further aggravated the situation. Oil prices doubled, while India faced one of its most severe balance of payments crises since independence. 

By 1991, Indian foreign exchange reserves had fallen to $1-1.2 billion, which was not enough to cover the costs of oil imports. Repeated oil shocks, alongside domestic factors, further complicated the situation for India. 

The uptick in oil prices inflated India’s import bill. Due to the disruption in trade routes, India had to rely on costlier alternative routes. Additionally, the return of Indian expatriate workers from the Gulf reduced remittance inflows, further straining the economy. 

India pledged approximately 67 tonnes of gold to raise emergency funds to keep the economy afloat, according to official RBI records. Of this, about 47 tonnes were airlifted to the Bank of England and 20 tonnes to the Union Bank of Switzerland, raising about $600 million in foreign currency.  

The 2008 financial crisis

The 2008 financial crisis was primarily triggered by the collapse of the housing bubble in the US, which led to the worst global economic downturn since the Great Depression. As a complex chain reaction unfolded, the oil market crashed with oil prices fluctuating from $100 in January 2008 to $147 by July 2008, and then falling close to $30 by the end of 2008. 

While oil-exporting countries in West Asia and elsewhere saw windfall gains, the oil-importing countries like India faced severe trade deficits. The sudden spike in oil prices in mid 2008 pushed inflation in India to 12.9 per cent in August 2008. At the same time, GDP growth fell from 9.4 per cent to 6.7 per cent in 2008-09, while the fiscal deficit reached 6.2 per cent of GDP. 

To manage this shock, the government increased the prices of petrol by 5 rupees per litre, diesel by 3 rupees per litre, and LPG by 50 rupees per cylinder. At the same time, customs duties on oil were cut down to zero, and oil bonds worth 94,600 crore were issued to oil marketing companies to compensate for under recoveries. 

The Russia-Ukraine war

More recently, India’s energy import profile was affected by the Russia-Ukraine war that has been going on since 2022. India’s economic ties and energy imports from Russia date back to the Soviet era. But following the collapse of the Soviet Union in 1991, India increasingly turned to Gulf countries. 

But the outbreak of the Russia-Ukraine war largely reshaped this trajectory. In response to the Western sanctions, including a $60 per barrel cap on Russian seaborne crude, Russian oil was offered at discounted rates. India capitalised on this opportunity by increasing imports of Russian crude. 

However, in February this year, US President Donald Trump claimed that India had agreed to stop buying crude from Russia, while announcing the reduction of tariffs on the country to 18 per cent from 50 per cent.

Following the outbreak of the US-Israel war against Iran, Washington issued a one-month sanctions waiver for Russian crude specifically for India in early March. The waiver, which expired on April 11, has now been extended till May 16. This extension is expected to help India continue buying Russian crude in large quantities amid the squeeze on supplies from West Asia.

The Strait of Hormuz crisis

The US-Israel war against Iran that began on February 28 has resulted in one of the worst global oil shocks. As tensions in the Strait of Hormuz continue to evolve, oil markets remain highly volatile to geopolitical developments. 

On Wednesday (April 15), the ​White House sounded hopeful about reaching an agreement to end the war with Iran, while also warning of increasing economic pressure against Tehran if it remains defiant. Amid hopes of de-escalation in US-Iran tensions, oil prices dropped in early trade Thursday (April 16). 

The Iran war has affected India’s overall energy imports, be it crude oil, liquefied natural gas (LNG), or liquefied petroleum gas (LPG). India’s real economic growth rate is also expected to dip below the crucial 7 per cent mark in the current financial year due to the war, according to a new assessment by the World Bank. 

India’s response  

These oil shocks have caused significant losses to economies around the world. In response, countries have sought to strategise to minimise the impact of “weaponisation” of oil. For example, the 2008 financial crisis and the resulting oil crisis became one of the primary drivers of the shale oil revolution in the US. 

Similarly, India has taken a series of policy measures to better absorb energy market volatility. For example, following the 1973 oil crisis, India increased its investment in its domestic coal production, tapping into its abundant reserves. 

The 1979 oil shock also prompted policy rethinking that gradually culminated in the 1991 economic liberalisation. In addition, India has also sought to diversify its energy imports to reduce excessive dependence on a single source. It has developed SPRs to provide a buffer during periods of supply disruptions. 

India’s experience with past oil shocks highlights a pattern in which global energy volatility manifests as domestic economic strain through higher inflation, trade imbalances, and slower growth. As geopolitical tensions in the Strait of Hormuz continue to evolve, this historical susceptibility remains increasingly salient. 

While policy interventions, ranging from the diversification of import sources to the establishment of strategic reserves, have undoubtedly enhanced resilience, exposure to external shocks cannot be overlooked.  

Post read questions

Examine the implications of tensions in the Strait of Hormuz for India’s energy security and economic stability.

How do geopolitical conflicts influence global energy markets? Analyse with reference to recent developments involving Iran and Russia.

Compare the impact of the 1990 Gulf War, the 2008 financial crisis, and the Russia–Ukraine war on India’s energy supply and economy.

Evaluate India’s policy responses to global oil shocks. Have measures like diversification and strategic petroleum reserves been effective?

Discuss the role of strategic petroleum reserves (SPRs) in ensuring India’s energy security.

(Stuti Gogoi is a Doctoral Candidate at the Centre for West Asian Studies, JNU.)

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