Iran Moves to Block Strait of Hormuz: Global Oil Trade at Risk

Strait of Hormuz Blockade Latest News

• Iran’s Parliament has approved a proposal to close the Strait of Hormuz, pending a final decision by the Supreme National Security Council, following US strikes on Iranian military sites. 
• While previously seen as unlikely, the threat now appears serious.

Strait of Hormuz

• The Strait of Hormuz is a narrow waterway that connects the Persian Gulf with the Gulf of Oman, eventually leading to the Arabian Sea. 
• It serves as a crucial maritime passage for oil-exporting countries like Iran, Saudi Arabia, and the UAE. It handles a significant portion of the world’s oil trade.
• Its location in the territorial waters of Iran and Oman adds to its geopolitical sensitivity.

Geographic Vulnerability

• At its narrowest, the strait is just 33 km wide, with a 3 km wide shipping lane in each direction. 
• This limited space makes it highly vulnerable to blockades or attacks on passing vessels.

Significance of the Strait of Hormuz

• The Strait of Hormuz is the world’s most important oil and LNG transit route.
• In 2024–25, over 25% of global seaborne oil trade and 20% of global oil and petroleum consumption passed through it.
• Additionally, 20% of global LNG trade, mainly from Qatar, also transited the strait.

No Sea Route Alternatives

• Geographically, there is no direct sea route alternative to bypass the Strait. 
• Any disruption would severely affect global oil and gas flows, causing sharp price hikes and broader inflationary impacts.

Limited Overland Alternatives

• Saudi Arabia and the UAE have overland pipelines—the 5 million bpd East-West pipeline and the 1.8 million bpd Fujairah pipeline, respectively.
• However, these are insufficient compared to the 20 million bpd flow through Hormuz.

Higher Shipping Costs

Perceived risks in the region increase insurance premiums and security costs, making global shipping more expensive and further impacting global trade.

Iran to Block the Strait of Hormuz

Blocking or disrupting the Strait of Hormuz could involve laying sea mines, missile or bomb attacks on passing ships, detaining vessels, or launching cyberattacks on maritime systems.

Strategic and Diplomatic Constraints for Iran

• Despite repeated threats, Iran has never actually closed the Strait, even during wartime. 
• Experts say such action would harm Iran itself, especially its oil exports to China—its main customer—and strain recent diplomatic gains with Saudi Arabia and the UAE.

Global Consequences of a Blockade

A blockade would not only disrupt global energy markets, especially affecting China (which sources 47% of its seaborne crude from the Gulf), but would also provoke a strong military response, likely from the US Fifth Fleet.

Impact on India

• India, the third-largest crude oil consumer, relies on imports for over 85% of its oil and about 50% of its natural gas. 
• Nearly 47% of India’s May crude imports transited through the Strait, making it a lifeline for supplies from West Asian countries like Iraq, Saudi Arabia, UAE, Qatar, and Oman.

Price Volatility Is the Main Risk

• While India has diversified oil sources—including Russia, the US, Africa, and Latin America—a blockade of Hormuz would disrupt global supply chains.
• This, in turn, will cause oil and gas prices to spike, even if availability is not immediately compromised.
• A price surge would impact trade deficit, forex reserves, rupee value, and inflation, stressing the overall economy.

China’s Shift Could Intensify Demand Pressure

If Iran’s exports to China are blocked, Beijing may turn to other suppliers, increasing competition and further inflating prices, impacting India’s energy costs and broader economic stability.

Ripple Effects on Freight and Refining Margins

Disruptions would lead to higher freight rates and tanker insurance premiums, shrinking refinery margins across Asia, according to S&P Global’s analysis.

India’s Preparedness Amid Strait of Hormuz Tensions

Due to rising tensions in the Middle East, oil prices could temporarily rise to USD 80 per barrel, according to analysts.

India’s Key Energy Routes Remain Largely Unaffected

• Russian oil reaches India via the Suez Canal, Cape of Good Hope, or Pacific routes, bypassing the Strait of Hormuz.
• Qatar’s LNG supplies to India also do not rely on the Strait.
• Other LNG sources like Australia, Russia, and the US remain unaffected.

Diversification and Strategic Reserves Offer Cushion

• India can:
  • Tap into its strategic oil reserves (9–10 days’ worth of imports)
  • Increase imports from alternate suppliers like the US, Nigeria, Angola, and Brazil—though at higher freight costs

Potential Government Measures to Control Inflation

To offset rising domestic prices, the government may consider price subsidies, especially for diesel and LPG, to curb inflationary pressure.

Source IE | IT | HT

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