Will the escalating Iran-Israel conflict cause an oil supply issue for India? Indian refiners are exploring alternative energy sources, including those from West African nations, to ensure fuel supply security in case Iran blocks the Strait of Hormuz amid escalating tensions with Israel, according to oil industry officials.Following the eruption of Iran-Israel tensions on Friday, senior oil ministry officials and industry leaders are conducting scenario analyses and preparing contingency plans for potential supply disruptions and price volatility.The oil ministry reports that India maintains crude oil and petroleum product storage facilities capable of meeting 74 days of domestic consumption requirements. The strategic petroleum reserves account for 9.5 days of this total capacity. Unlike its strategic crude reserves, India has not established gas storage facilities. Additionally, the government maintains confidentiality regarding national oil and gas inventory levels.Industry executives indicate that this overall storage capability includes stocks at refineries, pipeline networks, vessels in transit, product storage terminals, and vacant tanks suitable for storing both crude oil and refined products.
What is the Strait of Hormuz & why it matters
- The Strait of Hormuz serves as a crucial channel for worldwide energy transportation. This strategic waterway, spanning just 29 nautical miles at its narrowest section, facilitates the movement of approximately one-third of maritime oil shipments and 20% of global liquefied natural gas.
- The strategic significance of this passageway, which connects the Persian Gulf to the Gulf of Oman and Arabian Sea, is emphasised by the US Energy Information Administration (EIA), which designates it as the “world’s most important oil chokepoint.”
- The International Energy Agency (IEA) reports that in 2023, roughly 20 million barrels per day (mb/d) of crude oil and refined products traversed the Strait of Hormuz, accounting for about 30% of global oil commerce.
- The majority of this volume—approximately 70%—was destined for Asian markets, with China, India and Japan being the primary destinations.
- Although alternative pipeline networks are present, their capacity remains restricted.
- According to IEA calculations, merely 4.2 mb/d of crude oil can be redirected through land-based routes, including Saudi Arabia’s East-West pipeline to the Red Sea and the UAE’s Abu Dhabi Crude Oil Pipeline to Fujairah. This available capacity constitutes just about one-fourth of the regular daily volume passing through the Strait.
Impact on India
A potential closure of the Strait of Hormuz could impact 40% of India’s crude imports and 54% of its LNG supplies. This strait currently facilitates approximately 30% of global oil trade and 20% of LNG shipments.India’s crude oil dependency on imports stands at 90%, with refineries heavily dependent on Gulf supplies. Russian imports constitute approximately 35%, Gulf nations contribute over 40%, whilst Africa, the US and other sources make up the balance. African imports declined to 5% in May from 12% in April.Also Read | Significant dent? How an escalating Iran-Israel conflict can threaten India’s growth story – explainedFor 2024, India’s LNG procurement from the Gulf region stands at 54%, with Qatar providing 80% and UAE supplying the remaining amount. Qatar, ranking amongst the top three global LNG exporters, maintains significant influence over worldwide gas supply. Any interruption to Qatari exports could trigger a surge in spot LNG prices. Additionally, long-term LNG prices could increase, considering 60% of India’s long-term agreements are connected to crude oil rates.However, industry executives from Indian refining and gas companies express scepticism about Iran implementing a blockade, based on historical precedents. They suggest that such an action would likely trigger substantial price increases and direct US intervention, whilst also adversely affecting Gulf nations and oil-dependent countries. Additionally, executives note that blocking the strait would disrupt both Gulf exports and essential imports, including Iran’s own trade, which serves as a significant deterrent. Currently, Indian refiners are maintaining their normal purchasing patterns without resorting to ‘panic buying’.Also Read | Iran-Israel conflict impact: Basmati rice prices to drop as exports to Iran, third largest buyer of Indian basmati, expected to declineWhile contingency plans exist, an executive told ET that “closure of the strait would shrink the global pool of available oil and gas. No matter how carefully you prepare, every economy would feel the impact of a supply crunch and price spike.” Another executive highlighted the situation’s intricacy, stating, “If India turns to West Africa for additional supplies, other importers are likely to follow.”The international LNG trade lacks the maturity and flexibility seen in oil markets, with few options for supply diversification. The 2022 energy crisis highlighted this vulnerability when a former Gazprom subsidiary defaulted on its LNG delivery commitments to India’s GAIL, compelling the company to reduce supplies to domestic consumers.
