Trump proposes 20 per cent charge on Hormuz trade: Will India face another hike in oil prices?
As the West Asia war continues, a proposed increase in shipment charges is causing fresh worries regarding India’s oil prices
US President Donald Trump has reimposed a Navy blockade in the Strait of Hormuz, declaring the US as its "guardian" and proposing a 20% cargo shipping fee to recoup security costs, a move that could significantly impact India, which still imports approximately 50% of its crude oil through this vital waterway. This new $32 million per supertanker fee, compared to Iran's prior $2 million charge, raises concerns about substantial increases in oil prices for India, potentially adding around $30 million per supertanker. India faces difficult fiscal choices: the government could reduce excise duties, which comprise about 50% of the retail price, to stabilize prices but at the cost of significant revenue loss, or instruct public sector oil companies to absorb the costs, a financially unsustainable option if the charges persist long-term. While India's E20 petrol initiative aims to mitigate crude oil dependence, its 80% petrol component remains vulnerable to global price shocks, meaning current Indian petrol prices, ranging from ₹100 to ₹114 per litre, could escalate further due to these developments.
US President Donald Trump has reimposed a Navy blockade in the Strait of Hormuz, declaring the US as its "guardian" and proposing a 20% cargo shipping fee to recoup security costs, a move that could significantly impact India, which still imports approximately 50% of its crude oil through this vital waterway. This new $32 million per supertanker fee, compared to Iran's prior $2 million charge, raises concerns about substantial increases in oil prices for India, potentially adding around $30 million per supertanker. India faces difficult fiscal choices: the government could reduce excise duties, which comprise about 50% of the retail price, to stabilize prices but at the cost of significant revenue loss, or instruct public sector oil companies to absorb the costs, a financially unsustainable option if the charges persist long-term. While India's E20 petrol initiative aims to mitigate crude oil dependence, its 80% petrol component remains vulnerable to global price shocks, meaning current Indian petrol prices, ranging from ₹100 to ₹114 per litre, could escalate further due to these developments.
US President Donald Trump has reimposed a Navy blockade in the Strait of Hormuz, declaring the US as its "guardian" and proposing a 20% cargo shipping fee to recoup security costs, a move that could significantly impact India, which still imports approximately 50% of its crude oil through this vital waterway. This new $32 million per supertanker fee, compared to Iran's prior $2 million charge, raises concerns about substantial increases in oil prices for India, potentially adding around $30 million per supertanker. India faces difficult fiscal choices: the government could reduce excise duties, which comprise about 50% of the retail price, to stabilize prices but at the cost of significant revenue loss, or instruct public sector oil companies to absorb the costs, a financially unsustainable option if the charges persist long-term. While India's E20 petrol initiative aims to mitigate crude oil dependence, its 80% petrol component remains vulnerable to global price shocks, meaning current Indian petrol prices, ranging from ₹100 to ₹114 per litre, could escalate further due to these developments.
US President Donald Trump on Monday reimposed the Navy blockade in the Strait of Hormuz. Asserting that the US is currently the “GUARDIAN” of the strait, he also proposed a 20 per cent rate on all cargo shipped, as a fair method of reimbursement for the security it provided.
Trump's move raises concerns about a fresh spike in oil prices as India still imports around 50 per cent of crude oil through the Strait of Hormuz, despite gradually shifting its crude oil sourcing to Russia.
A supertanker can carry around 2 million barrels of crude, and based on the current price of $80 per barrel, the Trump’s proposed shipment fee would cost about $32 million per supertanker.
On the other hand, reports indicate that Iran was charging a fee of around $2 million per voyage for a supertanker, irrespective of the number of barrels.
So, the new shipment charge can add around $30 million to the equation. The charges are to be implemented immediately.
The Union government’s response will determine how the proposed hike will be reflected in India. During previous crude shocks, the government reduced excise duty, which allowed the price to remain relatively stable. This lowers the tax component, which amounts to around 50 per cent of the retail price. However, this can considerably depreciate the government’s revenue, making it a difficult fiscal choice to make.
The government can also instruct Public Sector Indian oil companies, such as Bharat Petroleum Corporation Limited (BPCL), Indian Oil Corporation Limited (IOCL), and Hindustan Petroleum Corporation Limited (HPCL), to absorb these prices. If the higher prices are expected to be short-lived, such companies will lower their marketing margins for a period of time. But if the charges don’t decrease in the long run, this method becomes financially unsustainable for these companies.
India’s rollout of E20 petrol, introduced to reduce dependence on crude oil, was expected to offer some insulation against sudden price shocks. However, while the price of the 20 per cent ethanol component will remain independent of crude prices, the 80 per cent petrol component is susceptible to global crude shocks, allowing the total retail price to change accordingly.
Current oil prices in India range from ₹100 to ₹114 per litre for petrol and ₹92 to ₹104 per litre for diesel.