The growing tensions in Hormuz have brought about a greater concern. The Strait is located between Iran and Oman and serves as a link from the Persian Gulf leading out to the sea. At its narrowest point, the strait is only 33 km wide, with shipping trades only having a width of three km. This small waterway is responsible for almost 20% of the world’s oil supply. Also, about 20 million barrels of oil are shipped through the strait every day. And almost all of Qatar’s LNG supply is transported this way.
Therefore, the waterway has an impact on how energy is priced around the world. Additionally, the location has immediate implications for India’s government. The Indian government imports approximately 80% of its crude oil. Just under 50% of the total crude imported by India comes through the Hormuz Strait. Accordingly, any type of disruption along the waterway creates a domestic risk for India. Fuel prices impact the rate of inflation in India and affect the government’s fiscal balance. As a result of this, maritime instability has a large influence on India’s macroeconomic picture.
How chokepoints amplify vulnerability beyond geography in the Hormuz economic risk
Hormuz is more than just a narrow channel; it is a global strategic choke point. Additionally, the Saudi and Emirati pipeline systems can provide a substitute for some of the seaborne volume, but they cannot adequately replace overall sea transportation. Historically, the strait has played a role in many geopolitical crises. With the 1973 boycott, energy leverage was made evident. The Iran-Iraq War demonstrated the vulnerability of tankers. Most recently, tensions have increased the likelihood of seizures and sanctions against vessels. Consequently, the cost of shipping insurance and freight has skyrocketed.
Freight costs contribute directly to higher landed prices for crude oil, leading to inflationary pressures across all sectors. Bab-el-Mandeb and Suez are also very fragile, and their closure would require shipping to circumvent Africa, adding weeks to supply chain delivery times. Therefore, maritime geography creates a market logic that will dictate how the market behaves.
Why diversification and reserves provide limited insulation
Strategic petroleum reserves in India have expanded in recent years, with Visakhapatnam and Padur leading the way in supplying buffer capacities for oil supply diversification. Furthermore, oil supply diversification to Russian and American suppliers continues; however, many of the alternate source suppliers use vulnerable sea routes to receive oil via the eastern route through the Strait of Malacca, which is still the world’s busiest oil supply chokepoint, while support for the diversification efforts of LNG suppliers is being made through the Panama Canal. Nonetheless, Hormuz remains critical in that respect due to its geographical proximity to the U.S. Fifth Fleet, and its presence is a result of the geopolitical sensitivity of the region and its potential for geopolitical shocks to affect the global oil benchmark prices.
All of these attributes contribute to lower stability risk on the Indian consumer’s inflation basket. As a result of this, Policymakers continuously monitor the shipping lanes through Hormuz as a result of the area being entirely foreign to them, and must continually adjust their global exposure to the market price fluctuations resulting from these shipping lanes. The persistence of Hormuz economic risk ensures that maritime instability quickly translates into domestic inflationary pressure in India.
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