Diversification & demand destruction: How India managed its energy needs amid the Iran war

By shifting crude sourcing to Russia, absorbing demand destruction, and shielding domestic households from soaring LPG and natural gas costs, India has managed the West Asian oil shock—though at a heavy cost to trade balances and commercial sectors.

The end of August marked six months since the attack on Iran by the US and Israel. Since then, it’s been a rollercoaster ride for global crude oil prices. Prices surged to above $110 per barrel between March and May, but saw a sharp slide as a ceasefire of sorts took hold. However, hostilities have flared up again, and crude is back above $100 a barrel.

High oil prices, coupled with serious disruptions to oil flows through West Asia, were never good news for the Indian economy, which remains heavily dependent on fuel imports. It has coped with the disruption so far, but has suffered on various fronts.

Price strain

In normal times, the Indian crude basket comprises Brent crude oil (the global benchmark) and the lesser-known Dubai-Oman benchmark in roughly a 70:30 split. As the crisis wore on, and Iran’s strikes on oil facilities in neighbouring countries such as Oman gathered pace, supplies to India were hit as well. India had to look elsewhere for crude supplies, changing this ratio to 78:22 in September so far. Beyond this mix, the cost of the Indian crude basket reflects broader trends in the oil market. It was $69 per barrel in February. If current hostilities continue, expect it to cross $100 again.

Crude is not the only problem for India. A parallel surge in gold prices driven by global market uncertainty has hit the trade deficit (exports minus imports) on two fronts. As the import bill of both items increased, the trade deficit rose to $86.6 billion in April-June 2026, against $68.7 billion in April-June 2025.

Country movements

As the conflict unfolded, India's primary challenge was navigating disrupted trade routes and sourcing alternatives. While the Middle East historically supplied the bulk of India's crude, Russia’s share has expanded significantly. Between March and June 2026, the latest period for which detailed trade data is available, Russia accounted for 39% of India’s crude imports, up from 32% in the year-ago period.

Supplies from Saudi Arabia were disrupted as the key shipping route from the Gulf, the Strait of Hormuz, was blockaded. Further, the share of Iraq, a key supplier to India, declined sharply from 18% to 3%. Meanwhile, several countries' share in India’s crude import basket increased, notably Iran and Venezuela, both of which involved a tacit nod from the US for India to increase crude purchases.

Demand destruction

The supply disruptions caused by the closure of the Strait of Hormuz have led to predictions that crude oil prices could rise well beyond $200 per barrel. It was expected to cause what economists call ‘demand destruction’ — sharp declines in demand for fuel because consumers are unable, beyond a point, to pay.

However, analysts were surprised at the extent to which demand fell. In a July report, JP Morgan analysts said the pullback in fuel consumption “[appeared] to have been substantially larger than first thought.” In India too, consumption fell sharply, with government data showing that demand fell at a faster pace than the decline in petroleum product supplies.

Overall production of petroleum products fell by 2% in the four months from March to July 2026 compared to the corresponding period last year. In contrast, the consumption of petroleum products fell about 3.3%. The case of LPG is fascinating—production increased 29% even as consumption fell 16%.

Household matters

Fuel price hikes are inherently politically sensitive—even more so as the US-Iran conflict and West Asian supply disruptions coincided with upcoming assembly elections in key states like West Bengal, Tamil Nadu, Assam, and Kerala. Facing acute shortages of LPG, the primary household cooking fuel, the government shifted the supply burden onto commercial users to protect domestic consumers.

Indian Oil Corporation (IOC) provdes data on prices of 14.2 kg LPG cylinders (mainly for home use) and 19 kg cylinders (for use in hotels and restaurants). In general, the cylinder intended for commercial use is priced higher. Since 2021, the average commercial-to-domestic price ratio has ranged from 1.5 to 2.5, meaning the 19 kg cylinder costs 1.5-2.5 times the 14.2 kg one. Over the past six months, however, this ratio spiked as high 3.44 before easing to 2.95 at present.

Chain reaction

Beyond crude, natural gas suffered severe supply shocks after strikes on Qatar's key processing facilities crippled global output. For India, which imports about half its natural gas requirements, this was a major challenge. Again, demand had to adjust, but where would the burden of adjustment fall?

The biggest consumers of natural gas in India are fertilizer plants, followed by city gas distribution networks and power plants. For the five months from March to July, five of the six categories of consumers saw consumption fall.

The exception was city gas networks, which saw consumption increase by 18%. To compensate, consumption by the fertiliser sector dropped 4% and the power sector 19%. In other words, the government went to great lengths to protect supplies of cooking fuel to consumers, while trying to hold prices stable. Other stakeholders paid for it, absorbing rising prices of a key input, which also had an effect on prices down the line.

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