The impact of an oil shock typically unfolds in stages, beginning with supply challenges before eventually feeding into fiscal balances, corporate earnings, and consumer prices.
Crude prices moves so far this year
| Date | Brent Crude ($/bbl) |
| Jan-01 | 60 |
| Feb-27 | 71 |
| Mar-02 | 77 |
| Mar-04 | 81 |
| Mar-05 | 85 |
| Mar-06 | 92 |
The first challenge: supply security
“There are two parts to it. One is supply, and one is the pricing. So definitely, the first priority remains to tie up the supplies to alternate routes to ensure that whatever we have got how we best utilise most efficiently,” said former Hindustan Petroleum Corporation (HPCL) Chairman and Managing Director MK Surana.
The current surge has been driven largely by fears around supply disruption through the Strait of Hormuz, a key global shipping route.
Probal Sen, energy analyst at ICICI Securities, said the market is now grappling with the scale of potential supply disruption.
“20% of global supply of oil, as well as LNG, getting out of the market… and the fact that now it does seem that the shutdown of the Strait is going to be longer and more difficult than what people estimated,” he said.
The second challenge: pressure on external balances
Higher crude prices quickly translate into a larger import bill for India, which imports around 5 million barrels of oil per day. The surge in prices from below $60 earlier this year to above $110 now means billions of dollars in additional outflows if prices remain elevated. That in turn puts pressure on the current account deficit and the rupee.
“Assuming that it (oil) remains at 100, we’re looking at a current account deficit of as high as 2% plus of GDP. But more importantly, it will percolate down to the capital account because clearly the impact will be also felt on the FPI flows. It will also be felt on other aspect, basically investment led impact of our borrowings, and to be very sure, it will be also impacting the rupee dramatically,” noted Madhavi Arora, Chief Economist at Emkay Global Financial Services.
Every $10 per barrel increase in oil leads to a current of deficit increase of around 0.5% of GDP on a static basis, Arora added.
However, Surana pointed out that the economy is less vulnerable to oil shocks today than in the past.
“What was the oil import bill as a part of the total GDP at that point of time, and what is it today? So, the percentage is much lower than what it used to be,” he said.
According to a HDFC MF note on January 27, multiple factors have contributed to oil imports falling to about 4.8% of India’s GDP from nearly 8.5% around 2012.
“First, the Indian economy has grown faster than oil consumption, led by services and domestic demand. Second, energy efficiency improvements, substitution toward gas and renewables, and better fuel standards have moderated oil intensity. Third, policy measures such as rationalisation of fuel subsidies and market-linked pricing have improved consumption efficiency. As a result, even when crude prices rise temporarily, the macro impact is less severe than in earlier decades,” the note stated.
The third challenge: earnings pressure for oil companies
Corporate earnings are another casualty of a crude spike, particularly for oil marketing companies.
Shares of HPCL, BPCL, and Indian Oil Corporation were down 5-6% as higher crude raises raw material costs while pump prices often remain unchanged for some time.
Sen warned that if companies are unable to pass on the increase in crude prices to consumers, losses could rise sharply.
“If retail margins continue to be at these negative levels, you can actually have a negative EPS (earnings per share) of somewhere around 80 to 90 as absolute worst case scenario,” he said, referring to HPCL in a stress scenario.
Refiners, however, could see temporary gains as product cracks widen during supply disruptions.
The fourth challenge: how much consumers eventually pay
Historically, governments have often absorbed part of oil shocks by delaying or limiting fuel price increases.
Surana said not all crude price spikes are immediately passed through to consumers.
“Because of the PSU character and because of the government involvement, the prices are accordingly managed. So not all the oil shock of the prices have been passed in the past to the consumers,” he said.
Arora pointed out that $10 increase in Brent prices typically raise consumer price inflation by about 35-40 basis points. However, she added, “I don’t think the pass through would be full, because there will be absorption of the price pain, both by OMCs as well as the government.”
Over time, however, higher oil costs tend to filter through the economy via inflation, fiscal costs or corporate earnings.
How long could crude stay this high?
Sandeep Tandon, Founder and Chief Investment Officer of Quant Mutual Fund, said options market signals suggest the spike may already be largely priced in.
“Crude will peak out closer to 120–130 mark… which means up to large extent this thing has been priced in,” he said.
However, he cautioned that prices may not fall quickly.
“Can we say going to correct sharply? Answer is no. So, it can remain elevated, but it has a potential for a peaking characteristic,” Tandon said.
He expects the spike to be temporary rather than structural, adding that the surge in crude “may not last beyond this quarter… maybe next two or three months.”
Arora also expects oil prices to settle back down around $70 in three to four weeks if the tensions deescalate, given that the demand-supply balance remains healthy.
For now, the trajectory of crude will depend largely on how long supply disruptions persist and how quickly shipping routes through the Gulf stabilise. Until then, oil markets are likely to remain volatile even if prices begin to plateau near current levels.
