India Faces Unprecedented Fuel Price Dilemma Amid Prolonged Straits of Hormuz Closure

India is confronting a historic fuel price challenge as the Straits of Hormuz remain closed for an unprecedented duration. This closure has lasted longer than the five-month Arab oil embargo of the 1970s, severely impacting global oil supply routes. With national elections concluded, the government now faces critical economic decisions, especially regarding fuel prices at the pump.

Key Highlights

• India faces record fuel price pressures due to prolonged Straits of Hormuz closure
• Government absorbs daily losses of ₹1,000 crore from high crude and gas prices
• Oil companies report losses exceeding ₹50,000 crore by end of current quarter
• India's strategic reserves cover only 15 days with plans for expansion underway
• Global peers have raised fuel prices by 20 to 30 percent while India holds steady

Economic Impact of Prolonged Closure

India, a major oil importer, has not increased fuel prices during the West Asia crisis. This approach is becoming unsustainable as Brent crude prices remain above $100 per barrel. The government had hoped for a resolution to the conflict, expecting the Straits to reopen and prices to drop. However, this has not materialized.

Government estimates show a daily loss of ₹1,000 crore due to high crude and gas prices. At the Brent price peak of $126 per barrel, the government absorbed ₹24 per litre for petrol and ₹30 per litre for diesel to avoid raising consumer prices. This policy has continued, despite ongoing high costs.

Additionally, the government reduced excise duty on petrol and diesel, incurring a further ₹170,000 crore loss to support oil companies. Despite these measures, oil companies reported losses of ₹30,000 crore by April-end, with estimates exceeding ₹50,000 crore by the current quarter's end. Losses from gas imports are estimated at over ₹20,000 crore.

Operational and Supply Challenges

India's strategic petroleum reserve holds 5.33 million tonnes, enough for 15 days. Plans are underway to build a 30-day strategic gas reserve, similar to Japan and South Korea. The government is absorbing ₹600 per 14 kg LPG cylinder and an additional ₹300 for Ujjwala beneficiaries.

To manage supply, India issued gas control orders, reducing demand but impacting gas-based industries. The country still needs to import 20,000 tonnes of gas daily. It has secured 800,000 tonnes of cargo at high prices, covering 40 days of demand. Fertilizer plants currently receive 70% of their daily gas needs.

The closure of the Straits of Hormuz has also increased marine insurance premiums and forced vessel diversions via the Cape of Good Hope. This adds 2-3 weeks to delivery times and raises freight costs by 15-20%. The world's largest LNG export terminal, Ras Laffan in Qatar, has been shut since March 2, with repairs expected to take over three years.

Global and Domestic Responses

Globally, countries like China, Netherlands, Norway, Germany, and the UK have raised petrol prices by 20-27%. In Japan, Italy, Spain, and Korea, increases exceed 30%. Some economies have implemented fuel rationing, remote work, and four-day workweeks. India has not yet adopted these measures.

The government now faces a difficult choice: continue absorbing rising costs or pass them to consumers, risking political backlash and broader inflation. The lack of a clear diplomatic resolution means uncertainty persists. The decision on fuel pricing remains urgent as operational options diminish.