US-Iran Conflict in the Strait of Hormuz and its Impact on India

Oil prices have been rising in the face of US-Iran conflict around the Strait of Hormuz. Almost 84% of India’s crude oil imports move through the Strait of Hormuz and India has great concerns as any price hike or disturbances in supply will prove to be costly and damaging to the country. India may need to use expensive and longer alternative routes. In addition, to protect its economic interest, it will need to strengthen diplomatic relations with the oil producing nations.

The Strait of Hormuz has been in the news lately with recent attacks on oil tankers, creating international fears about the route being vulnerable to attacks threatening and destabilizing global oil prices. Hormuz is situated between Iran and Oman, and connects the Gulf of Oman with the Persian Gulf and the Arabian Sea. It is the world’s most valuable oil choke-point that accounts for almost 30% of all crude oils and other liquids traded across the sea. In 2015, its daily flow was about 17 million barrels per day and 18.5 million barrels in 2016.

The Strait of Hormuz at its most narrow point is 21 miles wide; and shipping lanes here are only two miles wide, which are separated by a 2 mile buffer zone. However, it is deep and wide enough for the largest crude tankers in the world carrying in excess of 150,000 deadweight tonnes to move through the strait. (1)

Maritime routes are key to the transport of maximum amount of world’s petroleum and other liquids. In 2015, about 61% of the world production moved through maritime routes. By volume of oil transit, there are two strategic choke-points for transport of petroleum products across the world — the Strait of Hormuz and the Strait of Malacca.

These are defined as world oil choke-points by the US Energy Information Administration as they are narrow channels, along global sea routes which are widely used. Some of these channels are so narrow that they restrict the size of vessels that are allowed to navigate through them. These world choke-points for marine transport of oil are critical for the world’s energy security. (1)

There are very few potential options to bypass the Strait of Hormuz. Pipelines are available to Saudi Arabia and the UAE to transport crude oil outside the Persian Gulf. They also have additional capacity of pipelines if required to circumvent the strait. As estimated amount of total available throughput pipeline capacity at the end of 2016, was 6.6 million barrels per day of the two countries combined; and they had almost 3.9 million barrels per day bypass capacity that was unused.

Most of this oil shipping traffic in the Gulf of Hormuz heads for Asia to markets like India, China and Japan. Liquefied natural gas (LNG), a fuel increasing in importance, also follows the same route from the emirate of Qatar in huge volumes. The attack on the six oil vessels in May-June 2019 has raised serious concerns over escalating tensions between US and Iran. The subsequent strike on US drones (claimed by Houthi rebels), also forced Saudi Arabia to temporarily cease the flow of oil to its western side, and added fuel to fire in the US-Iran conflict.

As the east side of the Gulf is mostly a part of Iran’s coastline, Tehran will have the strategic advantage to harass the maritime trade in the region with mines, small boats, missiles and other weapons, if US tightens its sanctions on Iran. The Trump administration’s earlier decision to lift sanction waivers from the eight countries importing oil from Iran, is seen by Tehran as US attempt to reduce Iranian influence in the region and cripple their economy.

Caught between the crossfire between Iran and US, India stopped buying oil from Iran in May 2019 as the US refused to extend waivers on India’s oil trade with Iran. With India’s exit from this trade, Iran has lost its second largest buyer of oil after China. Their oil exports have now come down to less than one million barrels per day as compared to 2017 peak of 2.8 million barrels per day. Washington has heightened up economic sanctions on Iran, forcing Tehran to reduce its regional influence and keep its military activities under check.(2)

Given the robust presence of the US Navy in the region, experts are of the opinion that Iran will be unable to shut down the Strait of Hormuz. US also has the support of key regional players like the Saudi Arabia and Israel. Trump’s close friendship and solidarity with the Saudi Price Mohammad Bin Salman (MBS), could be the beginning of another military (mis) adventure in the Middle East, leading to a regional and generalized war. This could result in a huge disaster for the citizens, plunging the region headlong into devastation, destruction and unending terror.

The consequences of escalating tensions in this region will be quite serious for India as this would concern managing India’s energy security and an increased burden on its exchequer. India’s energy security, to a large extent, depends of the regional stability in West Asia and its trade with Iran which supplies almost 10% of India’s total oil requirement. In India’s energy security matrix, Iranian oil came with concessionary terms making it cost effective for India — it will be an expensive option to replace this requirement with alternative sources.

India will also need to strategically steer its ties with Israel and the Arab world on the one hand and Iran on the other hand. Also as this is a time when India’s diplomatic ties are evolving with Afghanistan and its investment in the Chabahar port; India needs its ties with Iran to safeguard itself from the shenanigans by Pakistan. Iran provides India with strategic access to not only Afghanistan but also the Central Asian region, a critical aspect of establishing India’s strategic footprint in this region.

The advantage, however, of Iran’s increasing isolation in world affairs — with the European Union unable to offer any solutions and China keeping low-key in this conflict, India seems to have emerged as a critical partner for Iran. While this is an opportunity for India to have its voice heard in Tehran, it will do well to keep in mind its equally important diplomatic relations with the US as well as the Arab Gulf states. (2)

References:
1. World Oil Transit Chokepoints, July 2017

https://www.eia.gov/beta/international/regions-topics.php?RegionTopicID=WOTC

2. Harsh V Pant, India’s Iran Dilemma, May 2019

https://www.deccanherald.com/opinion/main-article/india-s-iran-dilemma-735184.html

3. Wikipedia, India — Saudi Arabia relations

https://en.wikipedia.org/wiki/Iran%E2%80%93Saudi_Arabia_relations

4. How Tanker Attacks in the Strait of Hormuz Could Affect Oil Prices, Stanley Reed, June 2019

https://www.nytimes.com/2019/06/13/business/oil-tanker-attacks-strait-hormuz.html