OPINION | Hormuz shutdown shows why India’s energy security depends on supply diversification

The Strait of Hormuz is now a no-go area

The global oil and petroleum sector has once again assumed a central role in international geopolitics, with shifting equations among the US, Israel, and Iran exerting a decisive influence. These developments coincide with a period in which energy security remains paramount for major import-dependent economies such as India, where economic expansion, industrial activity, and consumer welfare are inextricably linked to the stability and affordability of crude oil supplies.

Chokepoint Hormuz 

West Asia continues to occupy a pivotal position in global energy markets due to its concentration of hydrocarbon reserves and the presence of critical maritime chokepoints, most notably the Strait of Hormuz. Nearly one-fifth of global oil trade passes through this narrow corridor, making it one of the most strategically sensitive transit routes in the world. Any escalation of tensions in its vicinity therefore carries implications far beyond the region itself.

Periodic flare-ups between Israel and Iran, alongside broader regional uncertainties, tend to elevate risk perceptions in international oil markets.

American impact on crude price 

The US plays a central role in this geopolitical equation, both as a security actor in the region and as one of the world’s largest crude producers. Its diplomatic posture, military presence and sanctions framework significantly shape oil trade flows and market sentiment.

Iran’s position remains particularly consequential. With proven reserves ranking among the world’s largest, even partial constraints on its exports whether from sanctions or logistical disruptions can tighten global supply-demand balances.

Markets react not only to actual disruptions but also to the probability of disruption, which often manifests in price volatility rather than physical shortages. 

Shale revolution hasn’t minimised price risk

Meanwhile, the expansion of shale oil production in the US has altered traditional supply equations. The U.S. now accounts for roughly one-fifth of global crude output, reducing its direct dependence on imported oil. Yet oil remains a globally priced commodity, and geopolitical disturbances in one region continue to transmit through international benchmarks. In this sense, the shale revolution has reshaped supply patterns but has not insulated the global economy from geopolitical risk.

Oil markets are unusually sensitive to geopolitical signals. Even in the absence of physical supply disruptions, expectations of potential conflict can push prices upward through precautionary stock-building and speculative positioning.

During periods of tension, shipping insurance premiums rise, freight costs increase and hedging expenses expand, raising the effective landed cost of crude for importing economies. 

OPEC plays a stabilising role in normal conditions

Producer groupings such as the OPEC and its partners continue to play an important stabilising role by calibrating production in response to demand trends. Together, they still account for around 40% of global oil supply, giving them considerable influence over price trajectories. However, when geopolitical tensions involve major producers or critical transit routes, market fundamentals and political risk interact in complex ways that are not always amenable to quick policy correction.

India’s strategic position

India is the world’s third-largest consumer of crude oil and imports over 89% of its total requirement. This structural dependence on external supplies means that global geopolitical developments translate directly into macroeconomic variables such as inflation, the current account balance and fiscal management. In this context, India’s energy strategy has increasingly emphasised diversification, flexibility and institutional preparedness.

Over the past decade, India has expanded its sourcing basket beyond traditional West Asian suppliers to include producers from Russia, Latin America and Africa. This diversification has reduced exposure to any single geopolitical flashpoint and enhanced India’s bargaining position in international markets. It also reflects a pragmatic recognition that energy security today is not about identifying one stable supplier, but about constructing a resilient portfolio. 

India has built strategic petroleum reserves with storage capacity of nearly 39 million barrels, providing a limited but important buffer against short-term disruptions. While these reserves cannot substitute for imports, they offer valuable time and flexibility during periods of acute stress.

Industry and consumer implications

For India’s refining sector, geopolitical volatility has reinforced the value of technological investment. The country’s refineries are among the most complex globally, enabling them to process a wide range of crude grades, including heavier and discounted varieties. This adaptability allows refiners to optimise feedstock selection based on price signals and availability, cushioning some of the cost pressures created by geopolitical uncertainty.

For consumers, global oil prices influence domestic fuel pricing primarily through import costs. However, India’s pricing architecture, tax structure and inventory management mechanisms provide partial insulation from abrupt international shocks. This balance between market alignment and domestic stability has become an essential feature of India’s petroleum policy.

A strategic inflection point

The present geopolitical moment highlights the deepening interconnection between foreign policy and energy policy. While tensions involving the US, Israel and Iran are driven primarily by political and security considerations, their economic consequences are transmitted through oil markets to countries far removed from the immediate conflict zone.

For India, the lesson is not merely one of vulnerability, but of strategic opportunity. Continued engagement with producing nations, participation in multilateral energy forums and investment in supply chain resilience strengthen India’s position in an uncertain global order.

At the same time, the steady push towards biofuels, electric mobility and green hydrogen represents a longer-term hedge against external volatility. While hydrocarbons will remain central to India’s energy mix for the foreseeable future, diversification across both suppliers and energy forms enhances national resilience.

(Pankaj Sharma was Additional Director, Petroleum Planning and Analysis Cell (PPAC), MoPNG.)

Views are personal and do not represent the stand of this publication.