Mint Primer: Oil shock looms as Iran threatens to shut Strait of Hormuz. What it means for India

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Business News/ Economy / Mint Primer: Oil shock looms as Iran threatens to shut Strait of Hormuz. What it means for India N Madhavan With 40% of its crude imports passing through the key waterway, India faces inflation and growth risks if Iran shuts off the Strait of Hormuz. Roughly one-fifth of daily global crude oil production transits the Strait of Hormuz. (Illustration: Reuters) Gift this article
The risk of disruption to the global oil supply has risen sharply after the US bombed Iran's nuclear facilities early on Sunday.
The risk of disruption to the global oil supply has risen sharply after the US bombed Iran's nuclear facilities early on Sunday.
Mint looks at how prepared India is to deal with this situation as Iran threatens to shut down the Strait of Hormuz. Is an oil shock imminent?
Immediately after the US attack on Iran's nuclear facilities in Fordow, Natanz and Isfahan, the Iranian Parliament voted to close the Strait of Hormuz, a narrow waterway that connects Persian Gulf to Gulf of Oman and Arabian Sea. It is through this waterway that a fifth of daily global crude oil production transits.
The final decision now rests with Iran's Supreme National Security Council. If the waterway is indeed closed, global oil supply, especially crude produced in West Asia, will be disrupted, likely sending prices sharply higher. Will Iran actually shut the Strait?
Historically, Iran has avoided blocking the Strait of Hormuz since 96% of its own oil exports — about 1.5 million barrels per day — pass through it. Shutting it down would cut off a vital revenue stream.
But, as experts warn, the situation now is very different. Iran has been weakened militarily. Its proxies — Hamas, Hezbollah, and the Houthis in Yemen — are either finished or on life support. Worse, the survival of the Iranian regime itself may be at stake. Thus, Tehran may now see closing the waterway as its only remaining leverage. How will oil prices react?
As markets opened on Monday, the benchmark Brent crude touched a five-month high of $81 per barrel before declining. Experts have forecast that crude oil prices could cross $90 per barrel and perhaps touch $100 if Iran shuts down the Strait of Hormuz.
The US has already warned Iran against such action and urged China — whose oil imports heavily rely on Hormuz — to intervene. How will this impact India?
Almost 40% of India's crude oil imports, roughly 2 million barrels a day, pass through the Strait of Hormuz. Its closure will cause a supply shock, at least temporarily, till supply is increased from other sources.
But the bigger worry is the oil price spike. Crude prices at $100 a barrel for a sustained period of time could stoke inflation, stall the nascent consumption revival, and drag down economic growth. Bank of Baroda Research estimates a 20 basis point downside risk to GDP growth if prices average $80 per barrel this year. How is India preparing to mitigate the impact?
India, the third largest oil importing and consuming nation in the world, has been steadily diversifying its source of imports in recent months. Its imports from Russia rose sharply in June to 2.2 million barrels per day. This is almost double the combined imports from Iraq, Saudi Arabia and Kuwait.
Imports from the US have also risen while those from West Asia have almost halved. Import from Russia and the US will not be affected by closure of Strait of Hormuz. It can also tap into its strategic oil reserve if there is a shortfall. Topics You May Be Interested In Catch all the Business News , Economy news , Breaking News Events andLatest News Updates on Live Mint. Download TheMint News App to get Daily Market Updates.