India deftly navigated one of the biggest disruptions to global energy supplies after the closure of the Strait of Hormuz, ensuring uninterrupted availability of petrol, diesel, and LPG despite a four-month supply disruption.

Investment in creating infrastructure helped blunt the impact of closure of the Strait and prevented a crisis at the pump and minimised the pain for households.

Closure of the Strait of Hormuz and surging prices

Following the US and Israel's strikes on Iran on February 28, Tehran closed the Strait of Hormuz, the most critical chokepoint for the global energy markets through which close to a fifth of the world's oil moves.

India imports close to 90 per cent of its crude and about sixty per cent of its LPG. As much as 50 percent of India's oil and 90 percent of its LPG supplies are routed via the Strait which were disrupted for almost four months due to the West Asia war. India is the world's third-largest oil importer.

Crude oil prices breached $100 per barrel as the disruption dragged on. The Indian crude basket rose from the low of $70 per barrel to over $120 per barrel within four weeks of the closure. Brent moved past $126/bbl at its peak, before falling back as the Strait reopened, to around $74/bbl by late June and easing further towards pre-crisis levels now.

The Saudi Contract Price for LPG rose by about 46 per cent between February and June, taking the import-linked cost of a 14.2 kg cylinder above Rs 1,600. War-risk insurance for vessels transiting the Strait rose several-fold.

How India managed the crisis, maintained supplies

Authorities issued control orders within days, a sharp lift in domestic production, an excise cushion on petrol and diesel, aggressive supply diversification and energy diplomacy was part of the strategy.

The government mounted demand-management efforts, and decided to let the public sector marketing companies absorb the cost rather than pass it to the households. This plan helped the country maintain fuel supplies.

Since past ten years, investment has been made to upgrade infrastructure to meet India's energy security needs. The country's LPG import terminals has increased to 22 presently from 11 in 2014 while import capacity has increased to 32.3 million tonnes per annum in 2026 against 12 mmtpa in 2014.

Crude sourcing is done from 41 countries in 2026 against 27 in 2014, with newer suppliers such as Libya, Gabon, Equatorial Guinea and Guyana added. Volumes from the United States and Russia have also deepened.

Exploring new routes has also helped as a smaller share of India's crude now transits through the Strait of Hormuz than it did earlier in the year.

Higher Ethanol blending provides a structural offset, saving a substantial volume of crude imports each year.

How much did it cost the government?

The marketing companies after holding retail prices unchanged for over two months increased the retail fuel prices by Rs 7 a litre on petrol and diesel. OMCs are presently carrying an under-recovery of about Rs 650 crore a day, down from a peak near Rs 1,000 crore.

With crude now easing and the Strait reopening, retail prices are expected to soften in the coming months, the government said. OMCs are expected to have incurred a loss of Rs 1 lakh crore to 1.2 lakh crore in the current quarter.

The Centre on March 27 cut central excise duty by Rs 10 a litre on petrol and diesel resulting in a revenue forgone of about 1.7 lakh crore rupees, according to govt data.

Macro resilience, keeping the ship steady

Throughout the crisis the government kept a close eye on the economy and ensured that there was least disruption. Foreign exchange reserves reached an all-time high of over $728 billion in the week the conflict began and held up through the disruption. GDP growth is holding near 7 per cent levels and there have been recent upgrades by investment banks after the peace deal between US and Iran.

The current account deficit has remained contained and the import cover has remained comfortable through the shock. Retail inflation has also remained within the Reserve Bank's tolerance band.

How India's response compares with other countries

Countries across the world adopted different strategies to tackle the disruption caused by the closure of the Strait of Hormuz ranging from tapping strategic petroleum reserves and capping prices or subsidising pump prices to imposing rationing

Several import dependent economies in Asia faced shortages and had to undertake drastic measures. India avoided rationing and kept retail price increase relatively tolerable.

Sri Lanka, still recovering from its 2022 collapse, reintroduced mandatory petrol rationing within a fortnight and moved the public sector to a four-day week. Pakistan closed schools, shortened the working week while Myanmar combined odd-even driving with QR-code rationing.

Bangladesh posted troops at its oil depots; and Ethiopia routed fuel to security forces and essential industry, suspending distribution altogether in Tigray.

Wealthier countries avoided rationing and turned to their reserves and budgets to soften the blow.

Japan ran down its strategic stock and subsidised the pump, South Korea capped prices for the first time in thirty years, and across the European Union twenty-two of its twenty-seven members had together spent over nine billion euros on relief by mid-April, Germany cut its fuel tax and Hungary released reserves which started running low.

Authorities in India did not declare any emergency and also did not resort to any rationing for households. There were no shortened working weeks, schools were not closed and there was no ban on driving cars.

The only restrictions applied were on commercial and bulk LPG and on the export of diesel and aviation fuel. These measures were taken to protect domestic household allocation.

What next as the Strait of Hormuz opens?

As of late June, the Strait is reopening after a peace deal announced between the US and Iran. The US has lifted its blockade of Iranian ports, and the first Indian-flagged LNG carrier, the Disha, carrying about 62,000 tonnes of cargo, has transited out of the war zone after more than three months.

Crude has fallen back to around $74/bbl, close to its pre-crisis level and still easing as tanker traffic through the Strait recovers.

Assessment by authorities show that a return to full traffic is expected to take some time due to the mine clearing operations and the passage of the backlog of vessels in the area.

India holds a comfortable inventory buffer of about two months across crude, LPG and LNG, and as the Strait reopens the benchmark is expected to ease.

Strategic reserves under ISPRL hold about 5.33 million tonnes, part of a cover of roughly three weeks, with the Chandikhol and Padur expansions set to take India towards about twenty-one days.

Source: Moneycontrol 

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