How India Navigated the West Asian Oil Shock: Diversification and Demand Destruction

India has navigated the energy turmoil triggered by the Iran war by reorienting its crude sourcing toward Russia, absorbing demand destruction, and insulating domestic households from surging liquefied petroleum gas (LPG) and natural gas prices. The strategy, while effective in cushioning consumers, has come at a significant cost to the country's trade balances and commercial sectors.

The conflict in West Asia disrupted traditional supply routes and sent global energy prices spiralling. In response, India deepened its reliance on discounted Russian crude, a shift that helped offset some of the price pressure. At the same time, demand destruction—the reduction in consumption due to high prices—played a role in balancing the market, as businesses and industries curtailed usage.

Households were largely protected from the spike in LPG and natural gas costs, a move that prevented broader social distress. However, the burden shifted to the external account, with the trade deficit widening, and to commercial users who faced higher input costs. The overall approach reflects a delicate balancing act between energy security, consumer welfare, and macroeconomic stability.