Oil Prices Reflect Geopolitical Risks, Not Only Supply, The New Reality of Global Energy Markets
As the Iran War Disrupts the Strait of Hormuz, Brent Crude Surges Past $118—But This Crisis Is Different From Those That Came Before
In the aftermath of the war in West Asia, crude oil prices surged to as high as $118 a barrel last week. Alongside rising tensions, this situation has been building for over two months. Since mid-December 2025, when Brent crude stood at $57.56, prices have surged by more than 100 per cent. They have, however, come down since then but remain in three digits, with no immediate sign of easing.
Historically, geopolitical shocks follow a predictable pattern. There is an immediate market overreaction, followed by gradual stabilisation as trade routes adjust and alternative supplies come online. However, the global oil market is once again operating under a profound geopolitical shadow—one that is fundamentally different from the shocks of the past.
This time, the relationship between geopolitics and oil prices has transformed. It is no longer simply about whether barrels are physically removed from the market. It is about how perceptions of risk, financial market dynamics, and the weaponisation of energy trade have created a new reality where prices reflect geopolitical sentiment as much as supply and demand.
The Shifting Nature of Geopolitical Risk
The developments in West Asia, intensifying strategic rivalries among major powers, and persistent conflict-driven uncertainty have brought geopolitics back to the centre of energy discourse. Yet the nature of this influence has shifted. Unlike previously, where regional conflicts rarely removed Gulf barrels from the global pool, the current disruptions have created tangible barriers to supply, fundamentally altering the costs, confidence, and conditions of the oil trade.
For major importing economies such as India, this shift has significant implications. Oil security is no longer just about physical access. It is also defined by exposure to the financial, logistical, and political uncertainties surrounding every shipment.
The vulnerability of global maritime arteries is stark. Around a fifth of global oil consumption is transported through the Strait of Hormuz, and roughly a tenth of seaborne crude passes through the Bab el-Mandeb and Suez corridor. The ongoing conflict involving Israel and Iran has effectively sidelined 20 per cent of global supplies, even in the absence of planned production cuts.
The market has reacted sharply to these signals. Over the past year, Brent crude has frequently fluctuated by 5 to 10 per cent within days of military or diplomatic developments, regardless of actual production volumes. Currently, however, the impact on physical supply is so drastic that prices continue to climb without a visible peak.
Beyond the Barrel: The Cost of Insecurity
Tensions do more than just inflate the price of a barrel. They make maritime trade insecure. Chokepoints remain vital arteries of trade, but their significance today lies in making global machinery vulnerable. Even limited disruptions or attacks on commercial shipping can alter vessel routing and raise freight costs.
The numbers are striking: daily rates for supertankers have more than doubled. Shipping insurance premiums have soared. Major container carriers have implemented emergency conflict surcharges or war risk surcharges. These escalations ripple through the supply chain, directly influencing landed import prices.
For a country like India, which imports over 80 per cent of its crude oil requirements, these costs are not abstract. They translate directly into higher prices for petrol, diesel, and LPG. They widen the current account deficit. They put pressure on the rupee. They feed inflation throughout the economy.
Oil as Political Instrument
Furthermore, oil has been transformed from a mere commodity into a political instrument. The redirection of Russian crude following the Ukraine conflict illustrates this dynamic. Although Russia maintained export volumes by pivoting to Asian markets, the shift introduced longer shipping routes, complex payment arrangements, and evolving compliance frameworks. What appeared stable in volume was highly volatile in operational and financial terms.
For import countries, this creates a dual exposure. Price volatility is no longer driven solely by the supply-demand balance but by changes in geopolitical sentiment. Markets respond to diplomatic signals, military developments, and regulatory announcements with a speed that often exceeds the pace of actual trade flows. This weakens the historical relationship between production levels and consumer prices.
The growing role of financial markets amplifies geopolitical sentiment, as oil is traded not only as a physical commodity but also as a financial asset through futures, options, and derivatives. During periods of stress, investors use oil as both an inflation hedge and a risk-sensitive instrument. This explains why speculative positions often expand even when physical inventories are comfortable—prices reflect expectations and portfolio behaviour rather than immediate scarcity.
The Evolution of Strategic Reserves
Strategic Petroleum Reserves (SPRs) have also evolved. Originally intended to address physical supply interruptions, they are now deployed to counter psychological volatility in the market. For instance, G-7 leaders have announced the release of 400 million barrels of oil in response to the war in West Asia—said to be about 20 days of the usual oil traffic through the Strait of Hormuz. The goal is to stabilise market sentiment as much as to provide physical barrels. The news of these discussions recently prompted a sell-off, easing Brent and West Texas Intermediate gains to some extent.
This represents a fundamental shift in the role of strategic reserves. They are no longer just emergency stockpiles for when the taps run dry. They are tools of market psychology, designed to signal reassurance and dampen speculative fever.
The Changing Geometry of Power
Major powers shape this environment in different ways. The United States, now one of the world’s largest producers of various petroleum products, influences markets through its strategic stock policies and diplomatic engagement with producers. Its ability to ramp up production or release reserves gives it a powerful tool to counter price spikes—though this tool is not unlimited.
Meanwhile, Asia has become the primary centre of demand growth, accounting for the majority of incremental oil consumption over the past decade. This shifts the centre of gravity of the global oil market eastward, with profound implications for how producers and consumers interact.
Producer coordination through organisations such as OPEC continues to influence supply management, but its impact now interacts with geopolitical risk premia embedded in prices. A production cut by OPEC+ might have a different effect in a time of geopolitical calm than in a time of crisis.
The Continuing Relevance of Oil
The energy transition adds another layer of complexity. While renewable energy and electric mobility are expanding, oil remains central to the transport, aviation, and petrochemical sectors. Global oil demand still exceeds 105 million barrels per day, and petrochemicals account for a rising share of incremental consumption.
This produces a segmented market: one part linked to declining fuel use, another tied to industrial growth. Thus, geopolitics continues to exert influence over a commodity whose strategic relevance is changing but not disappearing.
For India, where oil demand is not expected to peak soon and is projected to drive much of global growth, this environment requires adaptability rather than alarm. The ability to process diverse crude grades, source from multiple geographies, and maintain strategic reserves provides buffers against instability. Equally crucial is building commercial and financial expertise to navigate complex trading arrangements. Energy policy, in this sense, must integrate diplomacy, maritime awareness, and market analytics.
The New Meaning of Energy Security
This evolving structure complicates the notion of energy security. It now requires resilience not only against supply disruptions but also against financial and logistical shocks. Payment systems, shipping insurance, and contract enforcement have become integral to the energy security architecture.
A country might have sufficient physical supplies but still face energy insecurity if its payments are blocked, its ships cannot get insurance, or its contracts are disrupted. These dimensions were once secondary; they are now central.
The broader lesson is that oil has entered a phase where risk is as significant as the resource itself. Geopolitics will continue to influence oil prices by shaping perceptions of safety, reliability, and continuity, as well as affecting the physical flow of oil.
Understanding this transformation is essential for managing a vulnerable world. Stability now depends on preserving predictable trade mechanisms and avoiding diplomatic ruptures that amplify uncertainty. In the years ahead, the resilience of importing nations will depend both on the origin of their crude and on how effectively they manage the political and financial currents surrounding every barrel of oil.
Q&A: Unpacking the New Geopolitics of Oil
Q1: How has the relationship between geopolitics and oil prices changed?
A: Historically, geopolitical shocks caused temporary price spikes followed by stabilisation as markets adjusted. Today, the relationship is more complex and persistent. Prices now reflect geopolitical sentiment as much as physical supply and demand. Financial markets amplify this effect, as oil is traded as a financial asset through futures and derivatives. Speculative positions often expand even when physical inventories are comfortable, meaning prices reflect expectations and portfolio behaviour rather than immediate scarcity.
Q2: What are the non-price impacts of geopolitical tensions on oil trade?
A: Beyond price increases, tensions make maritime trade insecure. Freight rates for supertankers have more than doubled. Shipping insurance premiums have soared. Major carriers have implemented conflict surcharges. Vessel routing is altered, tightening availability. These costs ripple through supply chains, directly influencing landed import prices. For import-dependent countries, this creates exposure not just to price volatility but to logistical and financial uncertainties surrounding every shipment.
Q3: How have Strategic Petroleum Reserves evolved in their role?
A: Strategic reserves were originally intended to address physical supply interruptions. They are now deployed to counter psychological volatility in markets. The G-7’s announcement of 400 million barrels release (equivalent to about 20 days of Strait of Hormuz traffic) aims to stabilise market sentiment as much as to provide physical barrels. This represents a shift: reserves are now tools of market psychology, designed to signal reassurance and dampen speculative fever.
Q4: Why does oil remain strategically important despite the energy transition?
A: While renewables and electric mobility are expanding, oil remains central to transport, aviation, and petrochemicals. Global demand still exceeds 105 million barrels per day, with petrochemicals accounting for a rising share. This creates a segmented market: one part linked to declining fuel use, another tied to industrial growth. Geopolitics continues to exert influence over a commodity whose strategic relevance is changing but not disappearing.
Q5: What does energy security mean in this new environment?
A: Energy security now requires resilience not just against supply disruptions but also against financial and logistical shocks. Payment systems, shipping insurance, and contract enforcement have become integral to the security architecture. A country might have sufficient physical supplies but still face energy insecurity if payments are blocked, ships cannot get insurance, or contracts are disrupted. Resilience depends on the origin of crude, the ability to process diverse grades, strategic reserves, and the expertise to navigate complex trading arrangements.
