India could face a sharp surge in energy costs and supply disruptions if Iran makes good on its threat to close the Strait of Hormuz — a vital oil transit route that handles nearly a fifth of global oil flows. The escalating conflict between Iran and Israel has triggered fears of a blockade, which would deal a heavy blow to major Asian importers, including India.
Around 82 percent of crude and other fuel shipments passing through the strait are destined for Asian markets. China, India, Japan and South Korea together account for nearly 70 percent of all crude and condensate flows through the waterway, making them particularly vulnerable to any disruption.
Hostilities between Iran and Israel have heightened fears that shipping and crude flows through the narrow waterway could soon be disrupted. The ongoing conflict has renewed global focus on the security of this vital shipping route. Iran has previously threatened to close the Strait of Hormuz in retaliation to Western pressure.
For India, which imports over 85 percent of its crude oil needs, much of it from the Gulf region, any blockade or restriction in the strait could lead to a spike in fuel prices, strain the current account, and stoke inflation. It could also increase freight costs and force Indian refiners to seek costlier alternatives.
The Strait of Hormuz is widely regarded as the world’s most critical conduit for oil transport. Hostilities between Iran and Israel have heightened fears that shipping and crude flows through the narrow waterway could soon be disrupted.
The strait, which lies between Oman and Iran, connects the Persian Gulf with the Gulf of Oman and the Arabian Sea. The US Energy Information Administration (EIA) describes it as the “world’s most important oil transit chokepoint.”
At its narrowest, the waterway measures just 33 kilometres wide, with shipping lanes only two miles wide in each direction — making navigation both congested and hazardous.
Vast quantities of crude extracted by OPEC nations such as Saudi Arabia, the United Arab Emirates, Kuwait and Iraq are transported through the strait to global markets. Around 20 million barrels per day of crude, condensate, and refined fuels pass through the waterway.
Qatar, one of the world’s leading producers of liquefied natural gas (LNG), also depends heavily on the strait to export its LNG.
Although no significant attacks on commercial shipping have been reported since the latest round of hostilities began, shipowners are increasingly cautious. Some vessels have ramped up onboard security measures, while others have reportedly cancelled planned transits through the strait, according to the Associated Press.
Meanwhile, incidents of electronic interference affecting commercial ship navigation systems have increased in the vicinity of the strait and the broader Gulf. Such interference is reportedly disrupting safe passage for vessels in the area.
The threat of closure also raises the risk of wider regional instability. Any such move by Iran could invite military intervention from the United States, whose Fifth Fleet is stationed in Bahrain and tasked with protecting commercial shipping in the Gulf.
At the same time, a blockade would jeopardise Iran’s recently improved ties with Gulf Arab nations like Saudi Arabia and the United Arab Emirates. Both countries have criticised Israel for its attacks on Iran, but if their oil exports are obstructed, they may be compelled to oppose Tehran more openly.
Ironically, Iran itself would suffer from closing the strait. The country relies entirely on sea routes to export its oil, with the Strait of Hormuz serving as its only outlet. Analysts point out that such a move would damage Iran’s economic interests and its crucial energy partnership with China, its largest oil buyer.
Iran’s economy heavily relies on the free passage of goods and vessels through the seaway, as its oil exports are entirely sea-based. Hence, cutting off the Strait of Hormuz would be counterproductive to Iran’s relationship with its sole oil customer, China, analysts point out.
As tensions rise, India and other Asian importers are watching developments closely, knowing that even a short-term disruption in the strait could have outsized economic consequences.
With no clear resolution in sight, markets remain jittery. Any blockage of the strait or disruption to oil supplies could cause a sharp spike in crude prices, severely affecting energy-importing countries — particularly in Asia.
Tanker freight rates for vessels transporting crude and refined products from the region have also risen sharply.
The cost of shipping fuels from the Middle East to East Asia surged by nearly 20 percent after the fighting began. Rates to East Africa soared by over 40 percent.
Since China, India, Japan and South Korea are the top importers, these countries would be most vulnerable to any supply interruptions in the strait. Also, should Iran attempt to close the strait, it could prompt military intervention from the United States.
The US Fifth Fleet, stationed in nearby Bahrain, is charged with ensuring the safety of commercial shipping in the region. Any Iranian move to block the waterway would also risk straining its recently improved ties with Gulf Arab states such as Saudi Arabia and the UAE.
While Gulf countries have criticised Israel’s airstrikes against Iran, a disruption to their oil exports could compel them to adopt a firmer stance against Tehran.
Moreover, Iran itself relies on the Strait of Hormuz to export its oil, rendering any closure economically self-defeating.
Iran’s economy heavily relies on the free passage of goods and vessels through the seaway, as its oil exports are entirely sea-based. Hence, cutting off the Strait of Hormuz would be counterproductive to Iran’s relationship with its sole oil customer, China.
In recent years, Gulf Arab nations such as Saudi Arabia and the UAE have invested in alternative routes to circumvent the strait.
Saudi Arabia operates the East–West Crude Oil Pipeline, which has a capacity of five million barrels per day. The UAE, meanwhile, has developed a pipeline that connects its onshore oil fields to the export terminal at Fujairah, located on the Gulf of Oman.
Roughly 2.6 million barrels per day could be transported via these alternative routes in the event of disruption in the Strait of Hormuz.