What Happens If Iran Closes The Strait Of Hormuz? Understanding Consequences On Global Economy

Tehran: The Strait of Hormuz, a narrow waterway connecting the Persian Gulf to the Gulf of Oman, is one of the world's most strategically important choke points. The recent escalation in tensions between Iran and Israel, with the United States directly involved after bombing three key Iranian nuclear installations, has brought the Strait into sharp focus. Iran's warning that it may close the Strait of Hormuz has raised concerns about the big impact on the global economy and India's energy security.

The Strait of Hormuz is a vital artery for international trade, with nearly 20% of global oil exports flowing through it. The waterway is around 33 km wide at its narrowest point, with the shipping lane just 3 km wide, making it vulnerable to disruption. The Strait is used by tankers carrying oil and liquefied natural gas (LNG) from countries such as Saudi Arabia, the United Arab Emirates, Iraq, and Kuwait.

A closure of the Strait of Hormuz would have far-reaching implications for the global economy. The disruption to oil supplies would lead to a rapid increase in prices, which would have an adverse effect on the entire economy. The global economy would suffer, and countries that rely heavily on oil imports would be particularly affected. According to experts, the closure of the Strait could put the transit of about 18 million barrels per day of oil and other fuels at risk.

How Will It Impact India

India is particularly vulnerable to any disruption in the Strait of Hormuz. As per analysts, roughly 40% of India's oil and over 50% of its LNG imports flow through this route. Qatar alone accounts for around 80% of India's LNG imports, with another major chunk coming from the UAE, and both countries rely on the Strait for shipping fuel. Any closure of the Strait would drive oil prices up, cause inflation, and impact India's GDP. According to Foreign Affairs Expert Robinder Sachdev, "If Iran closes the Strait of Hormuz, India will definitely suffer. About 20% of the world's crude oil and 25% of the world's natural gas flow through these."

India's energy security is heavily dependent on the Strait of Hormuz. The country's reliance on imported oil and gas makes it susceptible to disruptions in the waterway. Experts suggested that India has been working to diversify its energy sources and reduce its dependence on imported oil, but the Strait remains a critical route for the country's energy imports.

As per analysts, a closure of the Strait of Hormuz would have consequences for India as well. The increase in oil prices would lead to higher fuel costs, which would harm the economy. The inflationary pressures would be felt across various sectors, including transportation, manufacturing, and agriculture. The impact on India's economy would be substantial, and the country would need to take measures to mitigate the effects.

India's Readiness And Mitigation

Union Minister Hardeep Puri has stated that India plans to source crude oil from outside the Persian Gulf and cut its own refined-product exports if the Strait is blocked. "I don't think this is something we are unduly worried about," he added. Ample crude is available on the global market, so the concern is not supply but price, the Minister said.

The Strait of Hormuz has been at the heart of regional tensions for decades. Earlier, in January 2012, Iran threatened to block the Strait in retaliation for US and European sanctions, but eventually refrained from doing so. In May 2019, four vessels, including two Saudi oil tankers, were attacked near the Strait of Hormuz, off the UAE coast. In July 2021, an Israeli-managed oil tanker was attacked off the Oman coast, killing two crew members.

Experts believed that while Iran might signal its intention to close the Strait rhetorically, it may refrain from actually doing so due to several reasons. According to an expert, there are important reasons why Iran might not actually do so, as it will hurt Iran's friend, China, the world's second-largest economy, and Iran's largest trading partner. The decision to close the Strait of Hormuz would rupture Iran's relationship with Oman and the Gulf Cooperation Council (GCC States), and it would also not work in the interest of the regime, as any closure of its oil exporting terminal would see a surge in prices.

Alternatives And Recent Events

According to a report by foreign media, the UAE and Saudi Arabia have tried to find other routes to bypass the Strait. Around 2.6 million barrels per day of unused capacity from existing UAE and Saudi Arabian pipelines could be available to bypass Hormuz, the US Energy Information Administration said in June 2024.

The situation in the Strait of Hormuz remains critical, with Iran's threat to close the crucial waterway raising concerns about disruptions to the global oil supply. 

India has been taking steps to mitigate the impact of the possibility of disruption in the Strait of Hormuz. The government has been working to diversify the country's energy sources, including increasing imports from other countries and investing in renewable energy. India has also been exploring alternative routes for importing oil and gas, such as the Chabahar port in Iran.

After Iran's decision, the world is closely watching the developments in the Strait of Hormuz. The United States, in particular, has an interest in maintaining the security of the waterway. The US Fifth Fleet, based in Bahrain, is tasked with protecting commercial shipping in the area.

The experts suggested that the Strait of Hormuz is a critical waterway that plays a vital role in the global economy. The recent escalation in tensions between Iran and Israel has raised concerns about the impact of a disruption in the waterway. India, in particular, is vulnerable to any disruption in the Strait, given its reliance on imported oil and gas. Amidst the escalation in tensions, the global leadership needs to work together to ensure the security of the Strait and prevent any disruption to global trade.