Significance of the Strait of Hormuz
The Strait of Hormuz is located between Iran in the north and Oman/UAE in the south. Although the strait does not pass through Iranian territory, it borders directly on the Iranian coastline, giving Tehran significant strategic influence. Most commercial shipping lanes are within Omani territorial waters, but parts fall under Iran’s jurisdiction, allowing Iran to apply pressure if tensions rise. Historically, Iran has threatened to disrupt traffic by conducting naval exercises, deploying military ships, laying mines or harassing oil tankers – tactics seen in previous regional confrontations. Although Iran cannot legally close the strait completely, even a limited obstruction could seriously disrupt global oil flows.The relevance of the strait becomes critical during periods of escalating tensions between the US and Iran, as nearly 20% of the world’s petroleum liquids and nearly 30% of marine crude oil pass through this narrow waterway every day. With few alternative routes available to Gulf exporters, global energy supplies remain highly vulnerable to disruptions. Even the threat of a blockade or a larger military move often leads to immediate price volatility.
A complete closure remains an unlikely scenario due to the strong presence of the US Navy and Iran’s own dependence on the strait for crude oil exports. However, temporary disruptions or increased military activity could still increase war risk insurance premiums, slow the movement of tankers and push oil prices higher.
Countries likely to experience negative impacts
Major crude oil importers such as India and China would be among the first and worst hit. Both economies are heavily dependent on supplies from the Gulf region, and any perceived threat to uninterrupted shipping could lead to near-term spikes in domestic fuel markets. This trend reflects previous periods of instability in the Middle East, when fears of supply disruptions caused temporary increases in oil prices even as physical flows remained largely intact.
However, these price shocks are often short-lived. Once diplomatic channels work together again or there is confirmation that shipping lanes remain operational, markets typically retreat, reducing some of the geopolitical risk premium.
Impact on Indian crude oil prices
If a military conflict between the United States and Iran breaks out, the immediate impact on India would be a rapid increase in crude oil prices due to concerns over a possible supply disruption through the Strait of Hormuz. A sudden spike in global crude oil benchmarks would increase India’s import costs and push up domestic crude oil and fuel prices. Such geopolitical shocks also increase speculative activity in oil futures, with crude derivatives witnessing increased trading volumes as traders try to hedge against volatility. Broader markets may remain stable during such periods as risk is concentrated within the energy complex.If higher crude oil prices continue, the impact will extend beyond the oil market. Rising petrol and diesel costs tend to translate into higher transportation and production costs, increasing inflationary pressures within the Indian economy. The longer global benchmarks remain high, the greater the potential for persistent inflation effects.
Alternative sources
In the worst case scenario with disruption of the Strait of Hormuz, India has the advantage of diversified supplies. In recent years, India has increased crude oil imports from countries such as Russia, the United States, Brazil and West African producers. This diversification helps buffer risks associated with tensions in the Persian Gulf. The government has also indicated its willingness to rely on strategic petroleum reserves and explore additional non-Gulf suppliers if necessary. Other measures could include reducing exports of refined products to prioritize domestic fuel availability and using alternative ports or supply routes where possible.
While geopolitical bias currently leans toward higher crude oil prices, the magnitude and duration of this increase will largely depend on whether the Strait of Hormuz experiences meaningful and sustained disruption. In the absence of an actual supply shock, any price increase is likely to be temporary and mainly driven by sentiment rather than structural supply constraints.
(The author is Head of Commodity Research, Geojit Investments)
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