How Iran’s attack on Israel could affect trade, oil prices and daily life

Iran stepped out of the shadows on Saturday (13 April) and launched an unprecedented attack against Israel. Over 300 missiles and drones were unleashed on the Jewish nation, eliciting much shock and anger, but causing little to no destruction.

Now, the world awaits Israel’s response. Will the Benjamin Netanyahu-led nation respond with its own attack or will it heed its allies’ call for restraint?

As we await Israel’s next move, we take a look at how a potential war could impact economies and global politics around the world. We answer the most important question: Will the common man be affected if a war breaks out between the two nations, which have gone from being friends to foes.

Oil and gas prices to be hit

The most significant impact of a likely war between Iran and Israel would be on oil and gas. Experts believe any escalation between the two nations may lead to a rise in crude oil prices, which in turn will push inflation upwards.

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As Michael Walden, Reynolds Distinguished Professor Emeritus at North Carolina State University, told USA Today that any ripple effects on oil and gas prices depend on the countries’ next moves and whether they seek further retaliation against the backdrop of an already raging war. “We’re uncertain about what’s going to happen,” he said. “And so the impacts are going to be very dependent upon what does evolve.”

Market watchers agree with this observation, saying oil prices could soar to $100 per barrel and beyond. They noted that Iran is the third-largest producer of oil in OPEC and any disruption to it would affect global markets. “Any attack on oil production or export facilities in Iran would drive the price of Brent crude oil to $100, and the closure of the Strait of Hormuz would lead to prices in the $120 to $130 range,” Andy Lipow, president of Lipow Oil Associates, told CNBC.

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Analysts also added that a key issue for the oil price going forward is whether shipping through the Strait of Hormuz will be affected. For the unaware, the Strait of Hormuz is a crucial shipping route, as about 20 per cent of the world’s total oil supply passes through it.

However, in the immediate aftermath of Iran’s attack, oil price s fell in early Asian trade. Brent crude was lower but still trading close to $90 a barrel on Monday morning.

For India, an increase in crude oil prices would see the cost of petrol rising. And a surge in petrol prices would impact the country’s growth, drive up inflationary pressures, disrupt the balance of trade and current account deficit, consequently exerting pressure on the rupee.

Trade and travel disruptions

Apart from oil prices being affected, trade and travel could also be hit in the likelihood of an Israel-Iran all-out war. Aviation and shipping sectors could be disrupted. In fact, several countries in the region, including Iran, Jordan, Iraq, Lebanon, and Israel, temporarily closed their airspaces, opening it later, albeit with restrictions.

Many airlines are considering alternative routes to avoid potential risks associated with flying over conflict zones. Flight tracking websites reported diversions of air traffic away from Iranian airspace, towards Kazakhstan, Tajikistan, Saudi Arabia and Egypt. But longer air routes mean more consumption of aviation fuel, which in turn, means more expensive airfares.

Manan Bajoria, group vice-president, growth, ixigo, said re-routing can result in longer routes and higher expenses for flights originating from Europe, West Asia and Southeast Asia.

In India, Air India, Vistara, IndiGo have rerouted several of their flights and experts note that this will lead to higher air fares. “This will have an inflationary impact on prices due to longer flying times, fuel price increase and volatility in flying schedules. It will also lead to enhanced travel uncertainty, thereby impacting the summer holidays travel season as long as this conflict plays out,” Aashish Gupta, consulting CEO, Federation of Associations in Indian Tourism and Hospitality (FAITH), was quoted as saying to Live Mint.

Trade would also be impacted. Experts have noted that India’s exports to Europe would be disrupted in wake of the renewed Iran-Israel tensions. In light of the evolving circumstances, they expect air freight volume to Europe to rise 10-15 per cent and logistics and insurance costs to rise.

Indian exporters of tea and basmati rice fear tensions could impact shipment of the two commodities, even as edible oil importers said sunflower oil prices could start to rise. This is because Iran accounts for a huge part of India’s rice exports. In the first 11 months of last year, Iran accounted for $598 million of India’s basmati rice exports. Moreover, countries such as Iran, Israel and adjoining nations are major consumers of basmati rice. If the region turns into a conflict zone, Indian exports could get heavily impacted.

Similarly, tea exports who were looking at increasing their business with Iran will be affected.

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A gold rush

With tensions rising in West Asia, investors are expected to become more cautious and move away from riskier assets into gold. In fact, gold prices have jumped, climbing past $2,410 per ounce, as per a Moneycontrol report.

On the Multi Commodity Exchange (MCX), gold rates on Monday (15 April) opened higher at Rs 72,214 per 10 gm and went on to touch a high of Rs 72,362 per 10 gm within a few minutes of the opening bell. In the international market, gold price is trading around $2,360 per troy ounce, which is around 0.70 per cent higher from its Friday close.

Royce Vargheese Joseph, Bullion & Energy Research at Kotak Securities speaking on the same told Live Mint, “Gold prices are largely driven by escalating tensions between Iran and Israel amidst the ongoing Middle East crisis. This geopolitical uncertainty has fuelled a rush into safe-haven assets, propelling gold prices up by 1.60 per cent. Despite this sharp increase, the overall trend in gold remains bullish, with strong support seen at Rs 70,000 per 10 gm mark.

Volatility in India’s stock market

Stock market analysts note that the geopolitical tensions will play out at the Sensex and the Nifty and have asked investors to be on their toes. Vinod Nair, head of research at Geojit Financial Services told news agency ANI, “The escalating geopolitical tensions in the Middle East, alongside supply concerns, have propelled crude prices upward, impacting overall market sentiment.”

Shrikant Chauhan, executive vice president, Kotak Securities, added that while the rising tensions between Iran and Israel wouldn’t be positive for the markets, the rising volatility could be manageable “if other countries don’t get involved”.

Economic pundits vary on how much the tensions between Iran and Israel would impact the world’s economy, but they do agree on one thing. As Manoranjan Sharma, chief economist, Infomerics Ratings opined that the stand of the government of the USA is likely to be a major factor in this rapidly evolving situation.

With inputs from agencies