UPSC Syllabus: Gs Paper 3- Indian economy and Infrastructure
Introduction
The crisis around the Strait of Hormuz reveals a deeper weakness in global trade systems. Earlier disruptions exposed supply chain fragility and encouraged redundancy in suppliers and logistics. However, the current situation shows that some constraints arise from geography and institutions rather than logistics. Strategic passages such as Hormuz cannot be easily bypassed, making them critical points of vulnerability for global energy flows.
The Earlier Crisis of Supply Chain Disruption in the Suez Canal
- Blockage of a critical trade route: In March 2021, the MV Ever Given, a 400-metre ship, ran aground in the 205-metre-wide Suez Canal and blocked the route for six days, halting about $9.6 billion in daily trade.
- Recognition of supply chain fragility: The disruption highlighted the risks of thin margins and fragile logistics networks, triggering a large debate on supply chain resilience.
- Policy emphasis on redundancy: The key lesson was that global trade requires redundancy, including diversified suppliers, larger inventories, and stronger logistics capacity.
- Economic nature of the crisis: The 2020–22 supply chain crisis emerged from logistical limits at ports, semiconductor factories, and container terminals, where demand exceeded capacity.
- Market adjustment as the solution: Higher prices encouraged more ships, increased production, and rerouting of trade flows, helping markets stabilise within about 18 months.
The Present Crisis of Energy Disruption in the Strait of Hormuz
- Strategic energy passage: The Strait of Hormuz, about 21 miles wide, bordered by Iran on the northern shore, functions as a crucial route for global oil and petroleum flows.
- Sharp fall in vessel movement:
- By March 3, Automatic Identification System (AIS) tracking recorded only nine vessels navigating the strait compared with a February daily average of 135 ships.
- The number of vessels fell from 91 on February 28 to 26 on March 1, showing a near-vertical collapse in movement.
- Insurance-triggered disruption: Seven members of the International Group of Protection and Indemnity Clubs issued 72-hour cancellation notices, soon followed by all twelve members.
- Commercial withdrawal of shipping: Once insurance cover disappeared, shipowners chose to wait rather than enter the strait, effectively halting traffic even without a physical blockade.
The Structural Difference Between Supply Chain Bottlenecks and Energy Chokepoints
- Insurance acting as the first chokepoint: The disruption occurred before any physical closure, as insurance withdrawal became the immediate barrier.
- Geographical limitation of the passage: The Strait of Hormuz cannot be widened or duplicated, making it a fixed physical constraint unlike flexible supply chains.
- Limited substitute routes: Existing pipelines from the Gulf can redirect only about 4.2 million barrels per day, while the strait normally carries around 20 million barrels daily.
- Absence of bypass for LNG exports: Qatar’s LNG, accounting for 19% of global supply, has no alternative route, reinforcing the strait’s central importance.
- Evidence from emergency adjustments: Saudi Arabia redirected oil to Yanbu, loading 2.44 million barrels per day against a six-month average of under one million, showing both the workaround and its ceiling.
- Rapid cascading effects in energy systems: Iraq’s Rumaila field cut production by 1.5 million barrels per day because storage filled and exports could not move.
The Economic Consequences of Disruption in the Strait of Hormuz
- Impact on price discovery systems: S&P Global’s Platts excluded Dubai, Upper Zakum, Al-Shaheen, and Murban loadings from the price-discovery process, disrupting the benchmark system used for pricing Middle Eastern crude sold to Asian buyers.
- Importance of the Dubai benchmark: The Dubai marker serves as the reference price for most Middle Eastern crude sold to Asian buyers.
- Rising price premiums in trading: By March 4, TotalEnergies bid $12 above the benchmark, compared with a premium of $1 in the previous week.
- Projected oil price increases: Goldman Sachs scenarios estimate that a one-month full closure could add $15 to oil prices, while full pipeline use could limit the rise to $12.
- Market already pricing risk: By March 3, oil markets had already incorporated a $14 risk premium, close to the full-closure scenario.
- Potential natural gas price surge: A two-month LNG disruption could push European benchmark gas prices (Dutch TTF) above €100 per megawatt hour, compared with €31.6 before the war.
- Limited supply response from shale: The International Energy Agency estimates that US shale could add 400,000 barrels per day, far below the possible 16 million barrel per day shortfall.
India’s Strategic Exposure to the Hormuz Energy Chokepoint
- Dependence on the Hormuz route: Around four to five million barrels of India’s daily hydrocarbon imports pass through the Strait of Hormuz.
- Limits of supplier diversification: India has diversified oil suppliers to ensure availability and affordability. However, about 4–5 million barrels of its daily hydrocarbon imports still pass through the Strait of Hormuz, so the maritime chokepoint risk remains unchanged.
- Institutional vulnerability in maritime insurance: India does not have its own Shipping Protection and Indemnity Clubs, which play a central role in maritime insurance.
- Global concentration of insurance institutions: Most P&I clubs are located in London and Europe, giving them significant influence over global shipping operations.
- Delayed institutional response: The Finance Minister acknowledged the need for an Indian P&I entity three years ago, but the institution has not yet been created.
Conclusion
Recent crises reveal a shift in the nature of global vulnerabilities. Earlier disruptions centred on supply chain nodes such as ports and factories, encouraging redundancy and diversification. The Hormuz crisis shows that strategic passages matter more. Geography, insurance systems, and pricing institutions shape global energy flows. Resilience must address critical maritime chokepoints, not only supply chain networks.
Question for practice:
Examine how the Strait of Hormuz crisis reveals the limitations of supply chain resilience strategies developed after the Suez Canal disruption.
Source: Businessline
