It has been widely reported that the closure of the Strait of Hormuz when war broke out bottled up some 15-20 million barrels per day (mbd) — about 20 per cent of globally traded oil. Initially, however, only exports from the Gulf Arab countries got blocked by Iran, while some 1.5 mbd of Iranian oil continued to be shipped to customers in China, who were not deterred by US sanctions. In mid-March, the International Energy Agency member states orchestrated a coordinated release of 400 million barrels from strategic reserves. More significantly for traders, Saudi Arabia rapidly refurbished and reopened pipelines to the Red Sea. This move, and the United Arab Emirates’ use of terminals on the Arabian Sea, brought back some 5-7 mbd of daily supply to world markets, despite Iranian efforts to bomb the alternative outlets.
When the US Navy’s successful “counter blockade” of Iranian ports in mid-April choked Iran’s exports, oil prices again rose sharply. But by then, China, the world’s largest importer, began drawing from its massive strategic reserves and reduced oil imports by over 4 mbd. Reduced demand from China prevented a higher price spike for all other importers, including India. US President Donald Trump’s repeated claims about progress in peace negotiations also seemed aimed at moderating oil market sentiment.
India proved clearly better prepared to deal with the oil shock this time around. Diversification of import sources, stretching from Russia to Venezuela — with Gabon in between — ensured that shipments of crude oil kept arriving at India’s ports. Unlike in 1990, we now have buffer stocks for some weeks, mostly in the commercial inventories of India’s world-class refining companies, and over a week’s requirements in strategic reserves. But our energy problems do not end with oil. They extend to liquefied natural gas (LNG) and, as we discovered, to liquefied petroleum gas (LPG) as well.
Almost half the LPG used for cooking was being imported, most of it from the Gulf. Over the last decade, import capacities have almost tripled as demand has kept rising. Alternative LPG supplies from the US could not cover the shortfall in supply. The government then enforced an LPG Control Order that led oil refineries to maximise LPG output — deploying great technical skill. According to official data, production of LPG was raised from 35,000 to 54,000 tonnes per day. This reduced other petrochemical streams like propylene, hitting downstream chemical industries, but household supply was substantially shielded.
The government also kept prices of LPG and petrol in check through administrative measures. This has led to massive losses for the oil marketing companies (over ₹1,000 crore per day based on official data). The finance ministry announced a reduction in excise tax on petrol to give relief to the companies, and that will hit the exchequer hard. The fiscal deficit for the current financial year could rise by half a percentage point to 4.8 per cent of gross domestic product, unless expenditure cuts are imposed later.
With the ceasefire bringing oil prices down, there is now relief. However, it is time for energy security to rise to the top of the national agenda. The first order of business must be to reduce India’s import dependence through an all-of-government approach to raising domestic oil and gas production. The commendable initiatives of the Ministry of Petroleum and Natural Gas are by themselves inadequate. If the archaic oil industry development cess (which is not used for oil industry development) is withdrawn, the exploration budget of ONGC can be doubled! Regulatory and legal issues (such as arbitration jurisdiction, enforcement of awards, duplication of clearances, and prolonged government litigation) that keep international oil companies out of India’s exploration patch, have to be resolved.
Strategic petroleum reserves have to be substantially increased. China holds more than 1 billion barrels in strategic and commercial reserves or 10 times as much as we do now. Additional cryogenic storage tanks for LPG and natural gas have to be developed in diversified locations. India’s coal gasification is less than 5 per cent that of China, and needs priority for implementation, not just policy announcements.
We also need a proactive approach to fuel security for our immediate neighbourhood before China steps forward with regional initiatives. The much-debated Trincomalee oil tank farms in Sri Lanka can hold over 8 million barrels of oil, close to two months of that country’s needs. Sri Lanka just narrowly avoided another 2022-style economic collapse by drastically rationing petrol and diesel sales. A collaborative project to redevelop the Trincomalee storage can provide buffer stocks for both Sri Lanka and the Maldives, and localised emergency requirements in India.
Despite decades of efforts towards energy transition, oil will remain the critical energy source for all nations for some decades. We can hope for peace opening the Strait of Hormuz, but must prepare for war closing it.
The writer is a former diplomat
 "Hormuz, oil tankers, crude oil")