Fragile Peace in the Middle East: A Global Domino Effect on Oil, Economies, and the Shifting Geopolitical Order

PAHARI BARUAH

June 25, 2025 – The world holds its breath as a “total ceasefire” has been declared between Israel and Iran, momentarily pulling the Middle East back from the precipice of a devastating regional conflagration.

While the immediate threat of full-scale war has receded, the echoes of the short-lived conflict resonate globally, reshaping oil markets, testing economic resilience, and accelerating the already discernible shifts in the international geopolitical landscape.

The diplomatic acrobatics that led to this truce, spearheaded by U.S. President Donald Trump, with critical facilitation from Qatar, underscored a pragmatic urgency to prevent an economic and humanitarian catastrophe.

Brent crude, which had recently surged past $81 a barrel on war fears, witnessed a sharp decline, briefly dipping below $67. This swift correction, while a welcome respite for energy-hungry economies, is a stark reminder of the immense “risk premium” attached to Middle Eastern stability.

The market’s volatile dance reflects not just immediate supply and demand, but the underlying anxieties of a world increasingly interconnected and vulnerable to regional tremors.

For a nation like India, which remains profoundly reliant on imported crude, these oil price gyrations are more than just numbers on a screen; they are direct determinants of its economic health.

The recent drop provides a temporary balm, easing immediate inflationary pressures that would have rippled through transport, manufacturing, and consumer goods.

However, the inherent fragility of the ceasefire means that India’s economic planners must remain vigilant and cannot afford to let their guard down. The potential for a resurgence of tensions in the region, whether through renewed conflict or even the mere perception of instability, poses a significant risk to the Indian economy.

Such an escalation could lead to a rapid increase in oil prices, which would have immediate and far-reaching consequences for India’s economic stability.

Rising oil prices would threaten to exacerbate India’s current account deficit, which is a critical measure of the country’s economic health that reflects the balance of trade in goods and services, net income from abroad, and net current transfers. A widening current account deficit can lead to a depreciation of the Indian rupee, making imports more expensive and further aggravating inflationary pressures.

Additionally, the Reserve Bank of India (RBI), tasked with maintaining price stability and supporting economic growth, would face a daunting challenge in this scenario.

The delicate balance the RBI seeks to achieve-between controlling inflation and fostering economic growth-could be disrupted if oil prices surge.

Higher energy costs typically lead to increased production costs for a wide array of goods and services, which can, in turn, drive consumer prices upward, complicating the RBI’s monetary policy decisions.

Israel under attack — Israeli soldiers work amid the rubble of residential buildings destroyed by an Iranian missile strike that killed several people, in Beersheba, Israel, on June 24, 2025. | Photo Credit: AP

Chief Economic Adviser V. Anantha Nageswaran’s cautious assessment that the inflationary impact of the current situation is “expected to be limited for now” underscores the precarious equilibrium that the Indian economy finds itself in.

While current indicators may suggest a manageable inflation outlook, the unpredictable nature of geopolitical tensions and their potential economic ramifications necessitates a proactive stance from policymakers. They must continuously monitor developments and be prepared to respond swiftly to mitigate any adverse effects on the economy, ensuring that both inflation and the current account deficit remain within sustainable limits.

Beyond the immediate economic calculus, the Israel-Iran skirmish has cast a harsh light on the evolving global order. The United States, under President Trump, demonstrated a willingness to engage directly in de-escalation, even as domestic political divisions over the conflict simmer.

Vice President JD Vance and Secretary of State Marco Rubio’s direct and indirect overtures to Iranian officials showcased a pragmatic diplomatic track, separate from the bellicose rhetoric often associated with such crises. Yet, the question of who “blinked first” remains a significant point of contention, with both Tehran and Tel Aviv claiming victory, underscoring the deep-seated mistrust that persists.

China Iran 1 — Supreme Leader Ali Khamenei receives Chinese leader Xi Jinping in Beit-e Rahbari, Tehran (File pic)

Iran’s Supreme Leader Ayatollah Ali Khamenei’s defiant assertion that “the Iranian nation isn’t a nation that surrenders” highlights the complex internal dynamics at play and the challenge to any notion of a clear victor.

The international community’s response has been a mix of relief and renewed calls for broader de-escalation. From Brussels to Beijing, capitals across the globe welcomed the ceasefire, but many echoed the sentiments of countries like the UAE and Turkey, stressing the need for sustained diplomatic engagement to prevent future flare-ups. A key geopolitical subplot here is the positioning of global powers.

China, with its significant economic ties to both Israel and Iran, found its long-standing dual engagement strategy severely tested.

While condemning Israel’s initial strikes and aligning rhetorically with Iran’s sovereignty narrative, Beijing also actively signaled its readiness to maintain stability, reflecting its deep interest in securing energy imports and protecting its ambitious Belt and Road Initiative investments across the region. Its mediating role in the Saudi-Iran rapprochement last year demonstrated its growing, albeit cautious, diplomatic footprint in the Middle East.

Russia, a key ally of Iran, condemned the U.S. and Israeli strikes, with President Vladimir Putin reportedly offering “unjustified aggression” as a descriptor. Yet, Moscow’s practical support to Tehran appeared somewhat limited, leading to murmurs of dissatisfaction from Iranian quarters.

This highlights Russia’s delicate balancing act, maintaining influence in the Middle East while navigating its ongoing conflict in Ukraine and seeking to leverage regional instability for higher oil prices and a distraction from its own strategic challenges. European nations, like France, while condemning Iranian actions and supporting Israeli security, consistently urged restraint and emphasized the importance of a negotiated solution, particularly regarding Iran’s nuclear program.

The spectre of the Strait of Hormuz, the world’s most critical energy chokepoint, loomed large throughout the conflict. While Iran’s parliament reportedly called for its closure, the devastating economic consequences of such a move, even for Iran itself, make a prolonged disruption highly improbable.

Nonetheless, the mere threat sent jitters through shipping lanes and insurance markets, a potent reminder of the region’s outsized influence on global trade and energy security.

For India, with nearly two-thirds of its crude and half its LNG imports traversing this narrow passage, the “Hormuz risk” remains a potent strategic vulnerability, despite its efforts to diversify crude sourcing, including increased imports from Russia.

As the dust settles on this latest Middle Eastern crisis, the global geopolitical landscape appears more fragmented, more multipolar, and undeniably more volatile. The Israel-Iran ceasefire, while a necessary pause, is unlikely to be a definitive end to their long-running shadow war.

The complex interplay of national interests, regional power dynamics, and the involvement of global actors will continue to shape the trajectory of a region that remains, unequivocally, the beating heart of global energy security and a critical pivot in the evolving international order.

For countries like India, the challenge lies in adapting to this new reality, building greater resilience, and navigating the unpredictable currents of a world constantly on edge.

China Iran — Wang Yi and Mohammad Javad Zarif at the Ministry of Foreign Affairs of Iran, after signing the 25-year cooperation deal between China and Iran,(File pic)

25-06-2025

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