Category: International

The Strait of Hormuz forms an essential international oil shipping chokepoint and it is also a place of crucial significance to India in terms of crude and LNG imports. More than 85 percent of their crude oil is imported and more than half of it goes through this strait. The conflict between Israel and Iran has simmered tensions in West Asia and brought about the fear of interference. Any closure of the Strait will also result in a rise in oil prices and will cause inflation in India. Strategically one of the concerns of India is her exposure to the global shocks in the field of energy.

Why in the news?

• The current conflict between Israel and Iran has increased the threat that the Strait of Hormuz possibly may be blocked and oil and gas transportation devastated. 
• The risk has raised the shipping costs and world-wide prices of crude products which directly hit the big importers of oil such as India directly.

Key Highlights

Regarding Strait of Hormuz:

• A small water channel between Oman and Iran.
• Leads to Persian Gulf - to - Gulf of Oman - to - Arabian Sea.
• Trades about 20% of the world's oil and LNG.
• Vital in the transport of oil in Iraq, Saudi Arabia, UAE, Kuwait, and Qatar.

Relevance to India:

• India is the 3rd largest consumer of oil in the world.
• Imports over 85% of its crude oil and approximately 50% of the natural gas.
• Approximately 47% of the Indian imported crude is transited through this strait.
• Large West Asia exporters: Iraq, Saudi Arabia, UAE, Kuwait, Oman, Qatar.

Conflict Impact:

• Iran has used the threat of blockage of the strait (but has never blocked it in the past).
• This may drive oil prices to as high as 120-150 dollars a barrel.
• Freight and insurance are already rising and already hitting import bills.

India Risks:

• This exposes India to shocks in energy prices due to high reliance on imports.
• All this causes disturbance in trade deficit, inflation, forex reserves and rupee value.
• Might trigger macroeconomic volatility and price increase of fuel at the domestic level.

Global Dynamics:

• China, who is one of the major purchasers of Iranian oil, can switch to other Middle East importers and this will influence the Indian supply.
• The spare capacity that OPEC has to offer is confined to the same conflict prone area.
• An absence of full bypass availability can only be found (e.g. pipelines by Saudi/UAE) but is inadequate.

Conclusion

India still regards the Strait of Hormuz as an important lifeline of energy. With all the Israel-Iran tensions, it is important that it protects the interests of its energy supply and diversifies to other energy sources. To reduce the effects of such geopolitical risks, India also has to improve its strategic oil reserves, energy diplomacy, and investments in renewable sources of energy.