Strait of Hormuz risks: Asia, including India and China, braces for economic jitters

The Strait of Hormuz—a narrow, 33-km-wide maritime chokepoint between Iran and Oman—is once again at the centre of global attention, this time more perilously than ever before. Amid intensifying military conflict in West Asia, Iran’s Parliament has reportedly approved a plan to block the Strait of Hormuz in retaliation of the US’ airstrikes on Iranian nuclear and military sites. While the final decision rests with Iran’s Supreme National Security Council, even the suggestion of a closure has already roiled global oil markets and raised alarm across nations that depend on oil imports for their energy needs.

The Strait is one of the world’s most critical energy arteries, through which nearly 20 per cent of the world’s oil and LNG (liquified natural gas) flows daily, according to the US Energy Information Administration (EIA). In 2024 alone, about 17 million barrels of oil and 25 per cent of global LNG passed through this route. A blockade—even if temporary—could disrupt more than $2 trillion worth of trade, spike oil prices beyond $120 per barrel, and unleash inflationary shocks across continents.

India faces the heat of the conflict

India, which relies heavily on crude and gas imports to power its economy, is particularly vulnerable. According to ICRA, 45–50 per cent of India’s crude oil imports pass through the Strait, sourced primarily from Iraq, Saudi Arabia, Kuwait, and the UAE. Additionally, India’s LNG imports, especially from Qatar, are routed through Hormuz, making the potential closure an energy security nightmare.

Oil prices have already surged in anticipation. Brent crude rose 2 per cent to hover near $80 per barrel, while analysts warn that a prolonged disruption could push it well past $100–120 per barrel.

The economic fallout for India would be immediate. ICRA estimates that every $10/barrel increase in oil prices would inflate India’s oil import bill by $13-14 billion annually, while widening the current account deficit (CAD) by 0.3 per cent of GDP. If crude averages $80–90/barrel in FY26, CAD may expand to 1.5–1.6 per cent of GDP, up from 1.2–1.3 per cent, triggering pressure on the Indian rupee and worsening inflation.

A 10 per cent surge in oil prices would also raise WPI inflation by 80-100 bps and CPI inflation by 20-30 bps, straining household budgets and increasing the cost of living.

Industries highly dependent on petroleum inputs, like tyres, paints, and fertilisers, would see margin pressures. Oil marketing companies (HPCL, BPCL, IOC) may struggle to pass on higher input costs, while upstream firms like ONGC and Oil India could benefit from elevated crude prices.

China’s dilemma: Energy strategy under pressure

China, the world’s largest crude importer, is also staring at major disruption. Roughly 14 per cent of China’s crude oil imports come from Iran, with additional volumes routed indirectly through Malaysia and the UAE to circumvent sanctions. China’s independent refiners rely heavily on discounted Iranian crude and fuel oil, while its vast plastics and petrochemical sectors depend on Iranian LPG, which makes up nearly 25 per cent of its LPG (liquified petroleum gas) imports.

A closure of Hormuz or a partial halt in Iranian exports would leave China scrambling to secure alternative supplies. Demand has already surged for Indian Ocean-side crudes like Abu Dhabi’s Murban and Russian ESPO. Any further disruption could force China to compete more aggressively in the spot market, pushing global prices even higher.

Asia’s energy axis: Japan, South Korea, and the rest

Beyond India and China, Japan, South Korea, and Southeast Asia also remain deeply exposed. Collectively, Asia consumes over 80 per cent of the oil and gas transiting Hormuz. Japan and South Korea, in particular, rely on Gulf oil for their refineries and LNG for their power plants. A closure could trigger energy shortages, increase power tariffs, and exacerbate inflation across the region.

For smaller Asian economies still recovering from the pandemic and supply chain shocks, this could prove destabilising. LNG-based power producers and city gas distribution (CGD) firms, like Adani Total Gas, Mahanagar Gas, and Indraprastha Gas, could see margins shrink as imported fuel becomes prohibitively expensive.

Global repercussions: From Europe to Wall Street

The impact won’t stop in Asia. Europe, still reeling from the fallout of the Ukraine war, depends on Qatari LNG routed through Hormuz. A disruption could intensify energy shortages and derail recovery.

The global shipping and insurance industries would also feel the pinch. Tankers, already paying higher war-risk premiums, may be rerouted through longer, more expensive paths like around South Africa, delaying deliveries and increasing freight rates.

Market volatility is inevitable. Stock indices have already begun to reflect war jitters, and a sustained oil rally could force central banks to revise inflation outlooks, pause rate cuts, or even raise rates again.

Iran’s strategic gamble: A double-edged sword

While Iran's threat to close the Strait may be driven by strategic calculations, it risks severe self-inflicted damage. Over 90 per cent of Iran’s own crude and LNG exports pass through Hormuz. Any closure would undercut Tehran’s discounted oil sales to China, one of its few remaining financial lifelines amid sanctions.

Moreover, closure would alienate allies like China and Russia, who rely on uninterrupted flows. It could also provoke a military response from the US, UK, or France, all of which maintain naval forces in the region. Historically, even during the Iran-Iraq war of the 1980s, the Strait was never fully blocked, underlining the severity of such a move.

Outlook remains fragile, volatile, and contingent on diplomacy

As of now, Iran has not formally enacted a closure, but tensions remain sky-high. The international community, including US Secretary of State Marco Rubio, has called on China to pressure Iran into restraint, warning of “economic suicide” if the Strait is blocked.

Short-term oil volatility is almost certain, with prices reacting sharply to geopolitical signals. Strategic oil reserves may offer temporary cushioning, but a prolonged crisis would require diplomatic interventions, alternate logistics planning, and possibly new trade partnerships.