India is facing the very real threat of an oil shock as new US sanctions targeting Russian crude come into force. The measures, recently introduced, apply to Russian oil producers and vessels transporting crude, complicating access to affordable Russian oil for the world’s most populous country and potentially driving up inflation in Asia’s third-largest economy.

India’s reliance on imports for 88% of its oil needs, with nearly 40% of this sourced from Russia, underscores its vulnerability. While China also imports large volumes of discounted Russian oil, its diversified supply sources mean it is likely to be less affected.

The US Treasury has already blacklisted 183 vessels, predominantly oil tankers, involved in transporting Russian crude. Although these vessels are allowed to make deliveries until mid-March 2025, the restrictions are expected to significantly disrupt Indian imports in the long run.

Trade records show that 75 of these ships have previously transported Russian oil to India, making up around 30% of the crude moved by these tankers in 2024.

India’s imports of Russian oil have surged in recent years after Moscow accounted for just 12% of India’s oil imports in 2021. By the end of 2024, however, this figure had risen to over 37%.

This shift in the wake of Russia’s invasion of Ukraine in 2022, which eventually led to Western sanctions and a subsequent sharp drop in Russian oil prices has led to a degree of unhealthy dependency on Russian oil for New Delhi; India having for the past two years focussed primarily on the discounts offered by Moscow and in the process benefiting from prices well below those offered by other suppliers.

As a result, energy analysts now predict the sanctions could create a major shortfall of up to 500,000 barrels per day for India. While alternative supplies from the Middle East might help bridge the gap, these are unlikely to match the cost advantages of Russian crude.

Global oil prices, including the Brent benchmark, have already risen and may increase further if the sanctions remain in place. This is a significant problem for Prime Minister Modi as India’s economy, which depends heavily on affordable energy, is particularly exposed to fluctuations in oil prices. A rise of $10 per barrel is estimated to push inflation up by 0.4%, either eroding consumer spending power or squeezing corporate profits if businesses absorb the costs.

Alternatively, government subsidies to help offset the impact could lead to additional strain on public finances.

Compounding these challenges is the depreciation of the Indian rupee against a strong US dollar of late which only increases the financial burden of oil imports. Higher tanker rates further add to the economic strain.

Furthermore, should fuel prices rise in India - historically a societal benchmark of sorts that has sparked public discontent in the past with protests over record prices in 2018 leading to widespread disruption - similar unrest could result.

As such, in a nation pegged as potentially the largest driver of global oil consumption by the end of the current year, ensuring stable and affordable energy supplies will be crucial for maintaining economic stability.