Why India's energy security is on a knife's edge after collapse of US-Iran deal

The memorandum of understanding signed by the United States and Iran on June 17 breathed hope into the energy world when it gave the two sides 60 days to work towards a final deal. Ships resumed crossing the Strait of Hormuz, although with strings attached. War risk premiums eased, and the Indian crude basket slipped back to its pre-conflict level of around $70 a barrel. Sadly, the renewed war winds blew that flicker out.

Barely a third of the way into the 60-day window, both nations declared the memorandum null and void. It capsized before the parties even came to the big sticking points of the nuclear programme, the proxies and war compensation. What sank it was something more elemental: deep disagreement over the rules of maritime passage through the Strait of Hormuz. With American airstrikes resuming and the naval blockade reinstated in mid-July, the region and the oil and gas world have plunged back into uncertainty. Brent, which had peaked above $126 a barrel earlier in the crisis, is climbing once more.

Whatever happens next, something has already been lost for good. The historical and legal consensus around the Strait of Hormuz, which survived the tanker war of the 1980s, decades of sanctions on Iran and even the 12-day Operation Rising Lion of June 2025, now stands shattered. The strait has been weaponised, whatever the tenets of international law may say. The MoU itself conceded as much. Its text stipulated that transit would proceed “with no charge for 60 days, only”, an implicit acknowledgement that charges could follow. It also directed Iran to hold talks with Oman, in consultation with other Gulf littoral states, to define the future administration of maritime services in the strait. This gave Iran a handle on the waterway that it is unlikely ever to give up. Even in the best-case scenario, the world must now live with a Hormuz that can be priced, rationed or closed at will.

Why does this matter for India? Few countries are as exposed. The Gulf supplies 40 per cent of our crude imports, 60 per cent of our LNG, 92 per cent of our LPG and over 60 per cent of our urea imports. Add to this the thousands of Indian seafarers who found themselves trapped in Gulf waters, some of whom lost their lives in attacks on passing vessels. The global economy may have received its biggest shock since Covid, but India’s burden has been disproportionate. To its credit, India handled the first phase of the crisis rather well. Whether the same playbook will work through a prolonged and more uncertain second phase is the question worth asking.

Crude sourcing has been the easier problem, since alternative suppliers exist. Procuring LNG and LPG has been far more complex. LPG fuels nearly 33 crore Indian kitchens, and LNG drives industry and fertiliser production. Through deft diplomacy and a whole-of-government effort, India extracted the highest number of laden vessels through the strait before the June 17 MoU: 12 LPG carriers, two LNG tankers and two crude carriers, several of them escorted out by the Indian Navy under Operation Sankalp. It is noteworthy that no queues appeared at petrol stations. Commercial users, from restaurants to ceramic units, took a hit, but household stoves stayed lit and fertiliser plants kept running. The Natural Gas and Petroleum Products Distribution Order, the amended LPG regulations and the direction to refineries to maximise LPG production all served their purpose. But such measures are short-term rationing tools, not answers to a prolonged shortage.

Nor can we lean indefinitely on commercial inventories. India’s strategic petroleum reserves cover barely 9.5 days of imports, and we hold no strategic stocks of LNG or LPG to speak of. The announcement during Prime Minister Narendra Modi’s Abu Dhabi visit on May 15, scaling up Abu Dhabi National Oil Company’s participation to store up to 30 million barrels of crude in our reserves, was welcome. But headline figures should not obscure the reality that strategic storage is capital-intensive and takes years to build. The time to commit to expanded crude reserves and new LPG and LNG reserves is now, not during the next closure of the strait.

Diversification has been the other lifeline. Government and refiners moved quickly to spread crude sourcing across some 40 countries, including resumed supplies from Venezuela. The pivot on LPG was sharper still: the United States, Canada, Norway, Algeria and Argentina stepped in to replace the bulk of Gulf supplies, and the American share of our LPG imports jumped from 14 per cent in February to 55 per cent in May. Moreover, Russia consolidated its position as our top crude supplier, and the US emerged as a leading supplier of both LNG and LPG. This spread of sources, whatever its logistics costs, is precisely what will stand India in good stead while uncertainty hangs over Hormuz.

India can also capitalise on the fissures within OPEC, most dramatically the UAE’s exit from the cartel in May. Freed from quotas, the Emirates shipped 3.94 million barrels a day in June, its highest in a year, while the weakened cartel has raised quotas for five consecutive months. Recognising that a closed Hormuz punishes exporters as much as importers, the Gulf producers have been proactive. The UAE has run its 380km Habshan to Fujairah pipeline flat out and is fast-tracking a second parallel line to double capacity by 2027. Saudi Arabia has pushed its 1,200km East-West pipeline to a record seven million barrels a day, though Yanbu’s terminals can actually load far less. And a caution: Iran retains the capacity to strike Fujairah directly. It has already started squeezing the Bab el-Mandeb through the Houthis. Bypass routes reduce the risk, but they do not eliminate it.

Another reassuring factor for India has been the government cushioning the price shock. When Brent nearly doubled off its floor, most countries either raised pump prices by around a quarter or resorted to rationing. India’s increase was marginal, achieved by cutting excise on petrol from Rs13 to Rs3 a litre and to nil on diesel, and by letting the three oil marketing companies absorb under-recoveries of Rs30,000 crore. This was the right call for inflation, but it is not sustainable. The exchequer bleeds, and under-recoveries punish the OMCs’ shareholders, of whom the government is the largest.

Nevertheless, one policy deserves harder scrutiny. The government’s strong defence of E20 ethanol blending has sparked intense public debate, and rightly so. The import savings are modest, while the costs are mounting: pressure on water, corrosion and reduced mileage in vehicles, and a visible shift of acreage away from oilseeds and pulses towards water-hungry sugarcane, maize and rice. We should not set food security against energy security when both are essential. A safer bet for displacing imported oil could be electric mobility.

Five priorities now demand attention. First, double the strategic petroleum reserve to 30 days of cover and fast-track a dedicated 30-day LPG reserve. Second, examine the feasibility of a subsea crude and LPG pipeline from Fujairah to India’s west coast, a route that bypasses Hormuz altogether and lowers the choke-point risk. Third, bring the refinery and upstream expansions at Numaligarh, Barmer and the west coast on line ahead of schedule. Fourth, write a diversification charter into policy so that no single country supplies more than 15 per cent of our crude or LPG. Fifth, accelerate the energy transition itself: solar manufacturing under the PLI scheme, the Green Hydrogen Mission’s electrolysers, grid-scale storage and electrified public transport. Every kilowatt hour generated within our borders is one that never has to pass through the Strait of Hormuz.

The strait could reopen next month or next year. Our vulnerability should not wait on either.

Sudhir is former ambassador to the UAE and distinguished fellow, JSW School of Public Policy, IIM Ahmedabad.