Oil as a Standing Tax: What the Gulf War Teaches

Seven months of war near the Strait of Hormuz keep oil near $100, and importers like India keep paying.

In late March, the price of Brent crude, the global benchmark for oil, touched about $118 a barrel. By 1 July, it had fallen to around $70. By late July, it was back above $100. In August, it ranged between $87 and $97. In September, it jumped about 14% and ended the month above $100 again. On 2 October, it slipped to around $99.7 after reports that Europe may release some of its emergency oil stocks.

That is a roller coaster. And it has been running for seven months, ever since the war between the United States and Iran began. For countries that produce oil, it has been a windfall in some cases. For countries that buy oil, it has felt like a tax that nobody voted for and nobody can turn off.

India is one of the largest oil buyers in the world, and its government and households are paying part of the bill. To understand how, and what to do about it, it helps to look at why oil behaves the way it does when a war breaks out near the source.

Why a war near Hormuz moves the whole world

A large share of the world's oil and liquefied natural gas passes through the Strait of Hormuz, a narrow channel between Iran and Oman. When that route is threatened, even without being fully closed, markets react.

There are several reasons. Ship owners and insurers charge more to travel through dangerous waters. Some cargoes are delayed or re-routed. Traders fear that supply may suddenly drop and so they bid up prices in advance. And governments, worried about shortages, buy extra stock, which adds to demand.

Today the picture is mixed. Flows from the Middle East have largely recovered to levels close to those before the war. Iran has received the US response to its latest proposal for ending the conflict, and mediators from Qatar are trying to bridge differences. But the Strait of Hormuz has not been fully and securely reopened, and there is no lasting agreement. On the other side, the United States is sending a third aircraft carrier and thousands of troops to the region. Some reports say President Trump has told aides he expects to resume bombing after the US midterm elections in November. That is an unconfirmed report, but markets take such signals seriously.

The result is a price that includes a large fear premium. When hopes of peace rise, the price falls. When attacks or threats rise, it jumps.

Oil is not only priced by supply and demand. It is priced by fear of what might happen next.

Signs of strain beyond crude

The strain shows in other numbers too. The gap between Brent and the US benchmark, West Texas Intermediate, widened to about $12 a barrel, the widest in four months. That points to tightness in diesel and other refined fuels, not only crude. Freight and insurance costs also affect delivered prices.

In the wider region, tensions continue. Saudi Arabia has accused the Houthis of striking a power distribution station in Medina, which the Houthis deny. The United Arab Emirates cut economic ties with Iran in August after accusing it of firing missiles. Iran's currency, the rial, has just fallen to a record low, which shows how deeply the war and the sanctions are hurting its economy.

Even a single incident can add to nerves. This week, a flydubai flight to Tel Aviv was involved in an attack in the cockpit by a co-pilot on the captain. Israeli officials have said the co-pilot was radicalised, and early assessments suggest he acted alone. President Trump has said Iran would be hit very hard if linked to the attack. That link has not been proven, and it should not be assumed. But the episode shows how quickly regional stress can spill into the news.

The tax that importers pay

Think of oil as a tax on any country that has to buy it. Every extra dollar on the price takes money out of the importer's economy and sends it to producers. For an importer, the effects follow a pattern.

• The import bill rises. More foreign currency is needed, which puts pressure on the exchange rate.

• Fuel prices go up. Households and businesses pay more for petrol, diesel, cooking gas and aviation fuel.

• Costs spread. Transport costs affect almost everything, from vegetables to cement.

• Inflation climbs. Central banks may need to raise interest rates to cool prices, which slows growth.

• Government finances are squeezed. If the state cuts taxes or gives subsidies to shield people, its deficit widens.

India fits this pattern closely. It imports roughly 85% of its crude oil. On 1 October, aviation fuel prices rose by about ₹16 a litre and commercial cooking gas by ₹62.50 a cylinder. The rupee is near 95.90 to the dollar, down more than 6% this year. Retail inflation was 4.82% in August, above the RBI's target. Economists expect the RBI to raise rates on 7 October, partly because of oil. The Sensex hit a 2026 low on 1 October, with oil among the reasons cited. The Finance Ministry itself lists high crude prices among the factors weighing on India's ability to attract capital.

Other importers feel it differently

India is not alone. Japan's crude imports rose 13.1% in August compared with a year earlier, the third monthly rise in a row, as it rebuilt stocks and changed its sources. Singapore and Taiwan depend on Qatari gas. Countries such as Pakistan and Bangladesh are especially sensitive to price swings because their reserves are thin. Europe, meanwhile, is considering releasing part of its strategic reserves to ease pressure.

The International Energy Agency reports a notable shift. Spending on new oil supply is expected to fall for a third straight year in 2026, to below $500 billion, while investment in gas is rising to about $330 billion, a decade high, led by new liquefied gas projects in the United States and Qatar. In plain terms, the world is putting less money into new oil just when it feels oil's vulnerability most. That could keep prices volatile for years.

What India has, and what it lacks

India has some real strengths. Its foreign exchange reserves, close to $800 billion, give it room to pay for imports. Strong GST collections and a healthy manufacturing index show the economy is resilient. It has also diversified some of its oil sources in recent years.

But the protection against a long supply shock is thinner than many people think. India's strategic petroleum reserves, held in underground caverns at a few coastal sites, are generally described as enough for roughly nine to ten days of crude consumption. Members of the International Energy Agency are expected to hold stocks equal to ninety days of net imports, and China is reported to hold far more than India. India has been adding capacity slowly.

What a smarter response looks like

There is no quick fix for an oil shock. But a country can reduce its exposure over time, and some steps help even in the short run.

1. Build and fill strategic reserves. Stocks should be expanded and bought during price dips, not panic peaks. This needs steady planning and money in the budget, not emergency announcements.

2. Diversify supply. Relying on a few sources or routes is risky. More suppliers, more types of crude and more long-term contracts reduce the impact of any single disruption.

3. Speed up domestic exploration and gas. A senior NITI Aayog official has called for faster exploration and a stronger gas network. This takes years, but each year of delay adds to the dependence.

4. Improve energy efficiency. Fuel-efficient vehicles, better public transport and efficient industry reduce the amount of oil needed.

5. Protect the poor, not everyone. Broad fuel subsidies are costly and weaken the incentive to save. Targeted help for low-income households, such as for cooking gas, is a smarter use of limited money.

6. Speed up electrification. More electric public transport, freight rail and cleaner power cut the link between oil prices and daily life, though they take time and investment.

None of these are secrets. The question is whether they are carried out in calm periods or only when prices spike.

The risk of looking only at the price

It is natural to watch the headline number. If Brent falls below $90, many people will relax. But the lesson of the past seven months is that the price can swing by $40 or more within a few months. A country that plans only when prices are high will always be late.

The same applies to the fiscal side. Governments may be tempted to cut fuel taxes to cushion households. That brings relief, but if repeated, it erodes revenue and limits the room for other priorities, such as rural support, at a time when farm incomes are already under pressure from the weak monsoon.

What to watch

In the short run, four signals matter most. First, whether the US reply and Qatari mediation lead to any ceasefire framework. Second, whether the third US carrier signals a new round of strikes. Third, whether ships pass safely through Hormuz and what insurers charge. Fourth, whether European countries go ahead with releasing strategic stocks, which could soften prices for a while.

In the longer run, the most important signal is whether the world's major importers use this moment to cut their exposure, or whether they wait until the next crisis.

The lesson of the standing tax

A war that began as a security story has become an economic story for much of the world. The price of oil near $100 is not just a number on a screen. It shows up in the fare for a flight, the cost of a gas cylinder, the interest rate on a home loan and the value of the rupee.

For India, the lesson is not despair. The country has reserves, growth and options. The lesson is that an oil importer in a volatile world needs to treat energy security as a standing project, not a crisis response. The tax will keep arriving as long as the dependence remains. The way to pay less is to need less, and to plan before the next spike.