Issue Brief

Impact of the crisis in West Asia on G-20 economies

The latest crisis in West Asia involving military confrontation between the United States, Israel and Iran, which further spilled over to other countries across the Gulf region, has rapidly emerged as a major geopolitical and economic shock for the global economy. The crisis has disrupted energy markets, unsettled financial markets, and heightened uncertainty for businesses and supply chains worldwide. For the G20 economies, which collectively account for around 85 per cent of global GDP and 75 per cent of global trade, such price shocks have immediate macroeconomic consequences.

Soaring Energy Prices

One of the most immediate economic consequences has been the sharp rise in oil prices due to the near halt in tanker traffic through the Strait of Hormuz, which lies between Iran and Oman, through which nearly 20 million barrels of oil per day or nearly one-fifth of global oil trade, flows. In addition to oil, the Strait of Hormuz is also critical for liquefied natural gas shipments. About 20-25 per cent of global LNG trade, primarily from Qatar, transits through this corridor. Any disruption in this area, therefore, affects both oil and gas markets, simultaneously. Such price spikes are bound to reverberate across G20 economies, affecting energy costs, inflation, industrial production, and global trade flows.

Before the crisis, Brent crude traded around USD 65-70 per barrel in early 2026. Following disruptions to tanker traffic through the Strait of Hormuz, Brent crude surged to around USD 90-95 per barrel in the first week of the crisis, representing one of the sharpest weekly increases in recent years of over 25 per cent. Analysts assess that prolonged disruption could remove 15-20 per cent of global oil supply from the market, potentially pushing prices to USD 100-150 per barrel.

Most G20 economies remain heavily dependent on imported oil and gas, particularly those in Asia and Europe. Sustained oil prices above USD 90 per barrel could significantly increase inflationary pressures and reduce economic growth. For major oil importers such as India, Japan, South Korea, Germany, Italy, and Turkey the impact is particularly pronounced. China is also the world's largest crude importer, making it sensitive to supply disruptions and price spikes. However, while China is a major importer of oil from West Asia, it has better reserves and more diversified supplies.

Oil Exporters vs Importers

The economic impact of the crisis, however, varies across G20 economies depending on whether they are energy exporters or importers. Energy exporters such as Saudi Arabia, Russia, and Brazil may benefit from higher oil prices through increased export revenues. However, even these countries face risks if the conflict escalates and disrupts energy infrastructure or shipping routes in the Gulf.

Macroeconomic impact

Rising crude prices increase import bills, weaken currencies, and widen fiscal and current account deficits. For India, which imports roughly five million barrels of crude oil per day, higher oil prices could raise inflation and increase pressure on the rupee. Similarly, Japan and South Korea import over 70 per cent of their oil from West Asia, making them highly exposed to supply disruptions in the region. In Europe, energy price volatility could undermine fragile economic recovery following the energy crisis triggered by the Russia-Ukraine crisis. In the United States, the conflict comes at a time when economic growth has already slowed. Preliminary estimates show US GDP growth moderating to around 1.4 percent in the last quarter of 2025, compared with stronger growth earlier in the year. Rising oil prices could add to inflation pressures, complicating the policy decisions of the Federal Reserve.

Disruptions to Global Trade and Supply Chains

Beyond macroeconomic effects, the crisis is threatening global supply chains that depend heavily on maritime transport through the Gulf region. Any disruption to shipping routes would invariably lead to increase in freight rates, insurance premiums, and delivery times, affecting global trade flows. War-risk insurance for vessels operating in the Gulf has already risen sharply, and some shipping companies have temporarily suspended transits through the region.

The rise in oil and gas prices has significant implications for industries across G20 economies. Petrochemical feedstocks, plastics, chemicals, and fertilizers rely heavily on Gulf production and export infrastructure. Supply interruptions could also affect manufacturing sectors ranging from automobiles and electronics to consumer goods.

Manufacturing: Energy-intensive industries such as steel, aluminium, cement, and chemicals face higher production costs when oil and gas prices rise. Petrochemical derivatives are used extensively in plastics, packaging materials, textiles, and automotive components. As input costs increase, manufacturers may face margin compression or be forced to pass costs onto consumers. Petrochemical derivatives are particularly sensitive to crude oil prices because they are used to produce plastics, synthetic fibres, and industrial chemicals. Nearly 30% of petrochemical feedstocks used in plastics production globally originate in the Gulf region.

Transportation and logistics: The aviation, shipping, and trucking industries are highly sensitive to fuel prices. Rising oil prices increase the cost of aviation turbine fuel and marine fuel, raising transportation costs globally. This can reduce trade volumes and increase prices for goods.

Agriculture and fertilizers: Natural gas and petrochemicals are key inputs in fertilizer production. Rising energy prices could therefore increase global fertilizer costs, affecting agricultural production and food prices across many G20 economies.

Consumer goods and packaging: Many consumer products rely on petrochemical derivatives such as plastics and synthetic fibres. Higher oil prices could therefore increase costs for fast-moving consumer goods, electronics, and packaging industries.

Financial Market Volatility

Financial markets have responded to the geopolitical shock with heightened volatility. Global equity indices experienced declines, with the Dow Jones Industrial Average falling roughly 3 per cent during the week ending March 6, while China's Shanghai Composite Index declined nearly 1 per cent. In India, the NIFTY 50 fell nearly 2.9 per cent in a single week, while the BSE Sensex declined by a similar magnitude. At the same time, India's volatility index surged sharply, reflecting rising risk aversion among investors.

Globally, investors have moved toward safe-haven assets such as government bonds and the US dollar. The strengthening of the dollar has put pressure on emerging market currencies, including the Indian rupee, which has weakened amid rising oil import costs. For instance, the Indian rupee depreciated to around INR 92 per US dollar, reflecting concerns about rising import costs. Foreign portfolio investors have also adopted a cautious stance, waiting for clarity on the trajectory of the conflict and the stability of global energy supplies.

Implications for Global Growth

If oil prices remain elevated for a prolonged period, the cumulative impact could slow global economic growth. Higher energy prices act as a tax on consumers and businesses, reducing disposable incomes and corporate profitability. Economists warn that sustained oil prices above USD 90 per barrel could reduce growth in several emerging economies by 0.2-0.3 percentage points, particularly those with high energy import dependence. Moreover, prolonged geopolitical uncertainty could delay investment decisions, disrupt trade flows, and reduce business confidence across multiple sectors. If tensions escalate further or disruptions to the Strait of Hormuz persist, the global economy could face higher inflation, slower growth, and more volatile financial markets.

Conclusion

The present crisis in West Asia demonstrates how geopolitical conflicts in energy-producing regions can quickly transmit shocks across the global economy. For the G20 economies, the crisis is affecting energy markets, financial stability, industrial production, and international trade, simultaneously. Oil-importing economies could face rising inflation and weaker currencies, while manufacturing industries would encounter higher input costs and supply chain disruptions. Businesses and governments across the G20 are, therefore, closely monitoring developments in the region, while exploring strategies to diversify energy supplies, strengthen supply chains, and mitigate geopolitical risks in the global economic system.