Why the US-Iran war continues to disrupt oil markets

The recent escalation in US-Iran hostilities, culminating in Iran's closure of the Strait of Hormuz in 2025, has sent shockwaves through global energy markets, reminding the world of the enduring fragility of oil supply chains. To understand the gravity of this development, we must first appreciate the historical context. The Strait of Hormuz, a narrow waterway between the Persian Gulf and the Gulf of Oman, has long been the world's most critical oil chokepoint. Approximately 20-21% of global petroleum liquids consumption — roughly 18-20 million barrels per day — transits this strait, including crude oil from Saudi Arabia, Iraq, UAE, Kuwait, and Iran itself, as well as LNG from Qatar. Any disruption here reverberates instantly across global markets. The current crisis did not emerge in a vacuum. Tensions have simmered since the US unilaterally withdrew from the Joint Comprehensive Plan of Action (JCPOA) — the 2015 Iran nuclear deal — in May 2018 under the Trump administration, reimposing crippling sanctions on Iran's oil exports. Iran's response has been a calibrated campaign of pressure: attacking tankers in 2019, seizing vessels, enriching uranium beyond JCPOA limits, and now, the unprecedented step of blocking the strait. This marks a dangerous escalation from asymmetric harassment to strategic denial of access. Key stakeholders are manifold. Iran views the strait as its ultimate leverage — a "nuclear option" to force sanctions relief. The United States, despite its shale revolution reducing import dependence, remains committed to freedom of navigation and protecting allies like Saudi Arabia and UAE. China and India, as the largest Asian importers of Gulf oil, face acute supply risks. Japan, South Korea, and Europe are similarly exposed. OPEC+ members, particularly Saudi Arabia and UAE, possess spare capacity but face logistical constraints in bypassing Hormuz — only the East-West Pipeline (Petroline) in Saudi Arabia and the UAE's Abu Dhabi Crude Oil Pipeline (ADCOP) offer limited alternatives, together capable of moving perhaps 6-7 million bpd. For India, the implications are profound and multifaceted. India imports over 85% of its crude oil requirement — approximately 4.5-5 million bpd — with roughly 60-65% sourced from the Persian Gulf region, much of it transiting Hormuz. A prolonged closure would trigger a sharp spike in the Indian crude basket price, widening the Current Account Deficit (CAD), fueling imported inflation, and pressuring the rupee. The fiscal math is unforgiving: every $10/barrel increase in crude adds roughly 0.4-0.5% of GDP to the import bill. This constrains monetary policy space for the RBI, complicates fiscal consolidation under the FRBM Act, and risks reigniting subsidy burdens on LPG and fertilizers. Constitutionally, the Union Government's powers under Article 246 read with Entry 53 of List I (Union List) — "Regulation and development of oilfields and mineral oil resources" — and Entry 54 — "Regulation of mines and mineral development" — empower it to manage energy security. The Petroleum and Natural Gas Regulatory Board Act, 2006, and the Oilfields (Regulation and Development) Act, 1948, provide regulatory frameworks. Critically, India's Strategic Petroleum Reserve (SPR) programme — established under the Special Purpose Vehicle, Indian Strategic Petroleum Reserves Limited (ISPRL) — holds ~5.33 million tonnes (approx. 39 million barrels) at Visakhapatnam, Mangaluru, and Padur, providing roughly 9-10 days of net import cover. The government has approved Phase II (additional 6.5 million tonnes at Chandikhol and Padur), but operationalization remains pending. This underscores the gap between policy intent and execution. Broader themes emerge: the geopolitics of energy transition, where fossil fuel dependence remains a strategic vulnerability; the role of strategic reserves as a buffer against geopolitical shocks; and the imperative of diversification — both in supply sources (expanding imports from Russia, US, Africa, Brazil) and in energy mix (accelerating renewables, green hydrogen, and ethanol blending under the National Biofuel Policy, 2018). India's engagement with the International Energy Agency (IEA) as an Association country since 2017 enhances data sharing and collective action mechanisms. Looking ahead, several scenarios are possible. A diplomatic de-escalation, perhaps mediated by Oman, Qatar, or the UN, could restore flows but leave a persistent "geopolitical risk premium" embedded in prices. A prolonged blockade would force coordinated IEA strategic stock releases, accelerate energy transition investments, and potentially reshape global trade routes. For India, the crisis reinforces the urgency of: (1) operationalizing SPR Phase II and exploring Phase III (including commercial-cum-strategic storage via PPP); (2) deepening the India-US Strategic Energy Partnership for assured crude supplies; (3) expanding the rupee-dirham/rupee-ruble trade settlement mechanisms to reduce dollar dependence; and (4) fast-tracking the 20% ethanol blending target (E20) by 2025-26 and the National Green Hydrogen Mission. The Hormuz crisis is not merely a supply disruption — it is a strategic wake-up call for India's energy security architecture.