Gulf on Fire: How the Iran war has exposed India's energy Achilles' heel

Every day, nearly 20 per cent of the world's daily consumption passes through the narrow strait between Oman and Iran. For India, this chokepoint is far more than a geographic landmark—it is a lifeline. The country relies on imports for about 85 per cent of its crude oil, roughly half of its LNG needs, and 60–65 per cent of its LPG consumption. Of these imports, 40–50 per cent of crude, nearly two‑thirds of LNG, and as much as 80–85 per cent of LPG are routed through Hormuz. That dependence turned into a crisis after the US‑Israeli strikes on Iran on February 28, 2026. Global markets reacted swiftly: Brent crude, which traded at $69 a barrel in February, has now climbed past $100, marking a 24 per cent surge. This time, it seems like uncertainty is not restricted to high crude prices, but concerns are also mounting over the actual availability of oil and gas supplies for India. 

We believe that the impact could be much broader if crude prices persist at higher levels, as crude tends to fuel general inflation given its linkages across every sector in the form of raw material, logistics, and power, among others. Chemicals and paints which use derivatives of crude as major inputs could be in for a surprise in terms of margins and capacity utilisation.

The impact of gas is not just limited to price, but more importantly, to availability. Gas serves the dual purpose of being used as a feedstock and fuel. Sectors like glass and ceramics, where gas as a fuel is irreplaceable, may see an immediate production curtailment or shutdowns. On March 9, the government issued an emergency Natural Gas Control Order. It redirected all domestic natural gas and regasified LNG to priority sectors, even overriding existing supply agreements. Under this plan, industrial users will get 20 per cent less gas, fertiliser plants will face a 30 per cent cut, and refineries and petrochemical units will see a 35 per cent reduction. However, supply for household PNG and CNG for transport will remain fully protected. Fertiliser factories, already receiving only 70 per cent of the gas they need, may have to cut urea production right before the kharif planting season. India also depends on this region for about 30 per cent of its key fertiliser raw materials like rock phosphate, phosphoric acid and muriate of potash. If this uncertainty continues, supply chains may break down, and global prices of urea and DAP could rise. This would mean the government might have to spend more on fertiliser subsidies than planned.

In our opinion, emergency interventions may offer short-term relief. However, complete delinking from the global energy markets is unlikely. In any energy disruption, the impact on gas is always higher, given that the storage capacity of gas is limited, unlike crude. India today has nearly 30 per cent reliance on Qatar for its LNG needs, which is higher than the global reliance of around 20 per cent. Hence, the impact on India is likely to be higher in the short term. Over the course of the next four years, as new gas contracts are signed, the sources of gas will get further diversified with the addition of new geographies like West Africa, Latin America, among others, and reliance on middle east may reduce.  Secondly, fertiliser, being the largest consumer of natural gas in the country, can look at acceleration towards the manufacturing of urea from the green hydrogen route. Thirdly, domestic production needs to be stepped up through greater focus on OALP, acceleration of unconventional gas development like CBM and syngas and greater production of CBG under the SATAT scheme. Finally, a greater level of hydrogen blending through the green hydrogen route could also alleviate import dependence over the medium term.

In order to lower shocks from crude, India can look at increasing its strategic reserve, as commercial reserves may be difficult to increase. Strategic and commercial reserves equal about 60-70 days of demand, with the Strategic Petroleum Reserve enough for nine to ten days of demand. IEA recommends oil stock equivalent to 90 days of net oil imports. India has successfully scaled up its Ethanol Blending Program (EBP) to 20 per cent, which can be scaled up further to say >25 per cent, which will be close to Brazil’s average level of blending. This would also entail an increase in flex-fuel vehicle penetration in India. India also needs to step up its domestic oil and gas exploration if it wants to move closer to energy self‑reliance and look at more acquisitions internationally, provided valuations and geopolitics align.

(Sidharth Agarwal is an Analyst at India Ratings & Research. Vivek Jain is the Director at India Ratings & Research)