Strait Of Hormuz Crisis and Impact

Source: Indian Express
GS II: Effect of Policies and Politics of Developed and Developing Countries on India’s interests

Overview

1. News in Brief
2. Strategic Importance of Strait of Hormuz for India
3. Impact of the crisis on India
4. Reasons for India’s Energy Vulnerability
5. Way forward

Why in the News?

The temporary blockade of the Strait of Hormuz, exposed India’s vulnerability to disruptions in global oil and gas supply chains.

News in Brief

• The Strait of Hormuz handles nearly one-fifth of global oil trade.
• India, which imports more than 80% of its crude oil requirements, faced supply disruptions and rising import costs.
• The crisis highlighted the risks associated with excessive dependence on a single maritime route for energy supplies, and warns that India must proactively strengthen its energy security framework before a similar crisis emerges in the future.

Strait Of Hormuz

• A narrow waterway connecting the Persian Gulf with the Gulf of Oman and the Arabian Sea.
• It lies between Iran and Oman.
• One of the world’s most important oil transit chokepoints.
• Facilitates the movement of crude oil, LNG and petroleum products from Gulf countries to global markets.
• Any disruption significantly impacts international energy prices.

Strategic Importance of the Strait of Hormuz for India

• Around 40% of India’s crude oil imports pass through the Strait.
• Nearly 90% of India’s LPG imports travel through this route.
• Approximately 55-60% of India’s LNG imports depend on Hormuz.

Impact of the crisis on India

Energy Supply Disruptions

• Crude oil imports declined significantly during the crisis.
• LPG and LNG supplies faced shortages.
• Alternative routes increased transportation costs and delivery times.

Rise in the import bill

• Global crude oil prices surged sharply.
• India paid substantially higher amounts for reduced import volumes.
• The trade deficit widened considerably.

Inflationary Pressures

• Fuel and power inflation increased sharply.
• Rising energy costs affected transportation, manufacturing and other sectors.
• Input costs spread across the economy, contributing to broader inflation.

Pressure on the Rupee

• Increased dollar demand for oil imports weakened the rupee.
• Currency depreciation raised import costs further.

Foreign Exchange Reserve Depletion

• RBI intervention to stabilise the rupee required foreign exchange outflows.
• Reserves witnessed a notable decline during the crisis period.

Monetary Policy Challenges

The RBI faced a policy dilemma

• Raising interest rates could hurt economic growth.
• Defending the rupee aggressively could deplete forex reserves.
• Inaction risked higher inflation.

Reasons for India’s Energy Vulnerability

High Import Dependence

• India imports the majority of its crude oil requirements.
• Domestic production remains insufficient to meet demand.

Concentrated Supply Sources

• Heavy dependence on Gulf countries for oil and gas imports.
• Excessive reliance on a single maritime route increases risk.

Growing Energy Demand

• Rapid economic growth continues to increase energy consumption.
• Demand growth outpaces domestic production capacity.

Implications for Energy Security

• The crisis demonstrates that energy security is not merely an economic issue but also a strategic and geopolitical concern.
• It underscores the need for
  • Diversification of energy suppliers is essential
  • Strengthening of strategic petroleum reserves
  • Supply chain resilience must become a national priority.

Way Forward

• Diversify Energy Sources
  • Increase imports from Russia, Africa, North and South America, and Central Asia.
• Strengthen Strategic Petroleum Reserves (SPR)
  • Expand crude oil storage capacity
  • Maintain emergency reserves for prolonged disruptions.
• Accelerate Renewable Energy Transition
  • Expand solar and wind energy capacity.
  • Promote battery storage systems.
  • Reduce dependence on imported fossil fuels.
• Promote Electric Mobility
  • Encourage EV adoption
  • Reduce petroleum consumption in transport.
• Expand Biofuel Usage
  • Increase ethanol blending
  • Promote alternative fuels in industry and transport.
• Enhance LNG Infrastructure
  • Develop diversified LNG sourcing arrangements.
  • Improve regasification and storage facilities.
• Strengthen Maritime and Energy Diplomacy
  • Enhance cooperation with Gulf Countries.
  • Develop alternative shipping corridors and partnerships.

Conclusion

• The reopening of the Strait of Hormuz may temporarily stabilize energy markets, but the crisis has underscored India’s structural vulnerabilities.
• Building a diversified, resilient, and sustainable energy ecosystem is essential to protect the economy from future geopolitical shocks.

UPSC Prelims Practice Question

With reference to Strait of Hormuz, consider the following statements

1. 1. It connects the Persian Gulf with the Gulf of Oman.
   2. Nearly one-fifth of global oil supplies pass through it.
   3. It lies between Iran and Oman

Which of the above statements is/are correct?

a) 1and 2 only

b) 2 and 3 only

c) 1 and 3 only

d) 1,2 and 3

Answer: d) 1,2 and 3

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