No Going Back To The Pre War Strait Of Hormuz

Of the several issues the US and Iran must resolve during their 60-day negotiating window, none is more consequential for international trade and the global economy than the future of the Strait of Hormuz. President Donald Trump has said that it will reopen toll-free, while US Secretary of State Marco Rubio, during his ongoing visit to the Gulf, declared that “no country is allowed to charge tolls or fees on an international waterway”. Iran, however, has announced plans to introduce a maritime fee for vessels transiting the Strait. Whether or not this ultimately takes the form of a formal toll, the sobering reality is that the Strait of Hormuz is unlikely to return to its pre-war status. Iran’s de facto control, and its ability to close it in response to Israel’s actions in Lebanon and other perceived threats, mean that the world will have to adjust to the region’s new strategic landscape.

A week after the signing of the Iran-US MoU, traffic through the Strait remains well below pre-war levels. Even if the US and Iran have agreed to agree, a return to business-as-usual could take weeks, if not months. Not only will shipping contracts, insurance policies and other arrangements be redrawn, tanker operators and their crews will now have to sail with the possibility that Iran could close the Strait again, without notice. Its adoption of inexpensive technologies, including shore-based anti-ship missiles, drones, speedboats and mines, has made it easier to disrupt maritime traffic while increasing the costs. There is, however, a longer-term scenario. The Strait, through which one-fifth of the world’s energy supplies pass, might become a diminishing asset as Gulf countries invest in alternative pipeline routes and the world accelerates the shift to alternative energy sources.

India cannot afford to wait for the next crisis. With the onset of war, imports of crude oil, LPG and LNG dipped, inventories declined, and the resulting disruptions filtered through to the domestic economy in the form of price hikes. India must diversify not only the sources of its energy imports but also the energy it consumes. Sourcing from a wider range of options, including the US, Canada, Russia and some African countries, can reduce dependence on any single route. In the longer term, the Indian government must accelerate the electrification of transport and industry. It must prioritise the adoption of renewable energy to shield the economy from supply disruptions and price shocks.