Brent spot prices have gone well past $90 a barrel with the war clouds over West Asia. The prospect for costlier oil is bad news for countries like India that imports 88% of its energy requirements, which would widen its trade deficit and push up inflation. The ongoing hostilities between the US and Iran clearly indicates that their memorandum of understanding (MoU) on June 18 to end the conflict and open the Strait of Hormuz has swiftly unravelled.
This has dashed hopes of a further decline in oil prices from $85 a barrel in June due to expectations of the US Energy Information Administration that production will soon return to near pre-conflict levels and that the majority of the shut-in crude production will be back on line. Instead there is the prospect that Brent could surge beyond the peak levels of $117 a barrel registered in April.
Unfortunately, India has been hit with a double whammy for its energy and other supplies. Hopes were raised when as many as 59 vessels heading for India — 23 Indian-flagged and 36 foreign-flagged ships — safely transited the Strait of Hormuz from March 1 to July 17, according to Shipping Minister Sarbananda Sonowal’s written reply to a question in the Rajya Sabha.
But with the US strikes on Iran and Tehran targeting American bases in the region, India has to brace for a complete shutdown of the Strait. As if all of this weren’t bad enough, the Iran-aligned Houthi threat to blockade Saudi Arabia’s shipments through the Bab-el-Mandeb subjects India to a fresh shock. Two oil tankers headed for India and China reversed course following these threats. This is a major setback to the growing share of Saudi crude in India’s import basket.
These are challenging times for India’s energy security as there are also relentless US pressures to reduce our dependence on Russian oil. In memory of the late Lindsey Graham, 60 US senators signed a bill proposing a 100% import duty on the top five countries, including India, that purchase oil from Russia. India of course is unlikely to change its sourcing strategy of accessing supplies at the best possible price.
India’s imports from Russia in fact surged by 53% in the April-June quarter of this fiscal. But the prospects of costlier oil and constrained supplies through the Strait of Hormuz and Bab-el-Mandeb underscore the near-term need to augment strategic oil reserves. India is seeking to do so through cooperation with the United Arab Emirates and Japan. The good news is also that the Oil and Natural Gas Corporation (ONGC) is building a 13-million-barrel strategic petroleum reserve in Mangalore.
The strategic imperative, however, is to go all in to increase relative self-sufficiency by boosting domestic production over the medium term. To be sure, the ruling dispensation has sought to incentivise domestic producers and global giants for exploration and production by enacting the Oilfields (Regulation and Development) Amendment Act, 2025.
A good augury for increasing domestic exploration is the Ministry of Petroleum and Natural Gas signing a tripartite MoU with Assam and Nagaland which was earlier impacted by insurgency. To facilitate this process, the policy regime must ease the high fiscal and regulatory burdens including withdrawing the archaic oil development cess. This would straightaway double ONGC’s exploration budget, according to former foreign secretary Ranjan Mathai. This is the way forward.