India's energy stress test: How agile policy kept the economy moving

India may not have escaped the US-Iran war unscathed, but it managed one of the most severe energy shocks in its modern history far better than many would have expected.

 

When the Strait of Hormuz effectively closed in late February, the country faced an immediate threat to its energy supplies, especially crude oil and liquefied petroleum gas (LPG). Yet four months later, there were no fuel shortages, LPG distribution continued uninterrupted, refineries largely maintained operations and the shock was largely prevented from feeding through into broader inflation and economic activity.

 

That was no small achievement. India imports nearly 90 per cent of its crude oil and around 60 per cent of its LPG, much of it normally arriving from the Gulf. The war disruption therefore threatened not only physical supply, but also inflation, industrial production and public confidence.

 

India’s response demonstrated that modern energy security rests on multiple layers of resilience. Strategic petroleum reserves remain an indispensable first line of defence, but this crisis showed they must be complemented by diversified procurement, commercial inventories, flexible refining systems, effective energy diplomacy and the ability of government and industry to respond swiftly and in concert.

 

India’s strategic reserve, while invaluable, remains modest by international standards. But substantial commercial inventories held by refiners bought precious time while replacement cargoes were secured and trade flows reconfigured. Refiners collectively held around 190 million barrels of commercial reserves — crude, LPG, gasoline, diesel and jet fuel — when the war began, or nearly 35 days’ worth of national consumption.

 

Years of crude supply diversification proved another critical pillar of support. Indian refiners have steadily invested in infrastructure to expand the range of grades they can process, enabling them to substitute supplies from different regions far more readily than in the past. India now imports crude from at least 41 countries, up from 27 just 12 years ago.

 

Relatively small producers and only occasional suppliers to India — including Congo-Brazzaville , Colombia, Azerbaijan, Egypt, Gabon, Sudan and Cameroon — were tapped for cargoes, while imports from the US also increased, as Washington encouraged higher exports to help offset the loss of West Asian supply.

 

With several Asian importers scouting for replacement supplies, speedy outreach and quick procurement decisions were critical. That necessitated unprecedented coordination between the public sector undertakings, private refiners and the government, supported by continuous monitoring of inventories, shipping schedules and refinery requirements.

 

India’s overall crude import arrivals dipped slightly to around 4.7-4.8 million  barrels per day (bpd) through March and April from an average of 5.3 million bpd over January-March but bounced back  above 5 million bpd through May and June, shipping data shows.

 

Russia became the anchor supplier in June, with arrivals climbing to around 2.56 million bpd, accounting for just over half of India’s crude imports during the month. LPG or cooking gas was the country’s most immediate vulnerability. Rather than relying solely on expensive replacement imports, refinery operations were quickly reconfigured to maximise domestic production.

 

Within days of the outbreak of the war, refineries were instructed to maximise LPG production by redirecting propane, butane and associated hydrocarbon streams. That boosted daily domestic production from roughly 35,000 mt to around 54,000 mt within a week, substantially reducing import requirements. Some refineries that had never previously produced LPG were reconfigured to do so.

 

That operational flexibility may have been one of the most consequential decisions taken during the crisis, helping reduce exposure to an increasingly stressed international LPG market.

 

New Delhi also pursued quiet energy diplomacy with Tehran to secure the safe passage of Indian-flagged LPG tankers through the Strait of Hormuz. At least 10 Indian-flagged vessels — nine carrying LPG and one crude — completed the transit between March and May after coordination with the Iranian authorities even as commercial traffic remained heavily restricted. Those cargoes helped bridge one of the most vulnerable phases of the crisis until domestic production increased and replacement imports from outside the Gulf could take up the slack.

 

Demand management reinforced supply-side measures. Where pipeline infrastructure existed, consumers were encouraged to switch to piped natural gas, easing pressure on LPG demand, while commercial LPG allocations were temporarily adjusted to prioritise household consumption. Securing supplies, however, was only half the battle: Preventing the inevitable spike in international energy prices from feeding through into the wider economy was just as important.

 

The government's decision to cushion retail fuel prices has inevitably attracted debate over the fiscal cost. Viewed narrowly, absorbing under-recoveries through oil marketing companies and excise duty reductions appears expensive. Seen through a macroeconomic lens, however, the calculation looks rather different.

 

Sharp increases in diesel and LPG prices would almost certainly have fed rapidly into freight costs, food inflation, manufacturing input prices and broader inflation expectations. In an economy growing strongly while continuing post-pandemic fiscal consolidation, the objective was not simply to shield consumers, but to preserve economic stability.

 

If there is one lesson from the US-Iran war, it is that resilience is built in layers.

 

Commercial inventories performed exceptionally well during this crisis, but they need to be backed up by government- controlled emergency stocks. The successive geopolitical disruptions of recent years have already given an impetus to government plans to expand emergency stockpiles, and this momentum should be maintained.

 

A phase 2 expansion, already approved, will add 6.5 million mt or about 47.5 million barrels to the existing 5.33 million mt capacity in strategic reserves, while feasibility work has begun on three additional projects. The broader objective is to move towards 90 days’ worth of net import cover in strategic and commercial inventories, the benchmark used by the International Energy Agency.

 

A bigger strategic oil buffer would give policymakers greater flexibility during future disruptions, reduce pressure on commercial operators and strengthen New Delhi’s bargaining position during periods of extreme market stress. That would complete a strategy whose success lay not in any single measure, but in the combination of long-term preparedness and adaptive crisis management.

 

The writer is an energy markets analyst with more than three decades of experience, and founder of Vanda Insights, a Singapore-based provider of global oil markets macro-analysis