This is the real Gulf War, and the world is paying the price

The true cost of the widest-ever conflagration in geographical terms since the Second World War is impossible to estimate because of the many imponderables, several of which are of an unprecedented nature. First, make no mistake, the scale of the ongoing war against Iran is the true Gulf War – not the mislabelled ones that happened earlier under the two Bush (George H.W. and George W.) administrations.

Israel, Saudi Arabia, Bahrain, Kuwait, Oman, Qatar, the United Arab Emirates, Syria, Iraq, Cyprus, and now, Azerbaijan, have all been attacked by either Iran or Hezbollah in the widest spread of conflict in the region in more than 50 years.

Also read: No other nation decides India's oil purchase: Officials

Although US President Donald Trump hazarded a four to five-week timeline for hostilities when he authorised the bombing of Iran on February 28, the sheer spread of hostilities in the region makes this a wild, and optimistic, guess, at best.

Even more importantly, Trump’s tearing up the longstanding global trade arrangements last April – misleadingly labelled “reciprocal tariffs” - which had facilitated the smooth connections between fragmented supply chains, introduces a new – and historically unprecedented – shock that adds more uncertain costs to countries navigating this crisis.

The Strait of Hormuz as a bottleneck

The closure of the Strait of Hormuz, a narrow passage connecting the Persian Gulf and the wider ocean, has obviously been of great significance because it serves as the passage for about one-fifth of the global supply of both crude oil and LNG (Liquefied Natural Gas). India is particularly vulnerable because almost half of its crude oil and 85-90 per cent of its gas imports pass through the Strait, especially from Qatar and Oman.

Happenings in the petroleum markets are just the first-order effects. As the war prolongs, it will envelop many more aspects of international trade.

Before the war, there were two, albeit smaller, alternatives to transit through the Strait of Hormuz – the Saudi Arabian East-West Petroline and the UAE’s Habshan-Fujairah pipeline, which together offer roughly 2.6 million barrels per day of transit capacity, an addition in capacity that is trivial when compared to the 20 million barrels per day capacity that is now out of action. Placed in the light of the magnitude of the capacity constraint, the Organisation of Petroleum Exporting Countries’ recent decision to authorise production increases of 206,000 barrels per day appears laughably trivial.

Energy infrastructure takes a hit

In contrast, consider this: the Ras Tanura refinery in Saudi Arabia, which produces 550,000 barrels per day has been shut after a drone strike; Kurdish fields in northern Iraq, which export about 200,000 barrels per day have also stopped functioning; and, in Israel, Chevron shut its offshore Leviathan gas field. An escalating scenario of wider supply shortages, not offset by alternative supply channels, thus looms.

The gas market fared no better. Qatar, the world’s second-largest LNG exporter and a primary supplier to the European and Asian markets has to route entire supply through the Strait of Hormuz. When Iranian missiles struck the Ras Laffan complex, the world’s largest LNG facility, QatarEnergy stopped production.

Also read: Iran war: India evokes ESMA, ramps up LPG production

On March 6, the Financial Times reported the Qatari energy minister Saad al-Kaabi as saying that even if the war ended immediately, it would take the country “weeks to months” to return to a normal cycle of deliveries following an Iranian drone strike at its largest LNG plant. Warning that the war could “bring down the economies of the world'', he said oil could reach USD 150 a barrel if the countries in the Gulf halted production. He said all producers in the region would sooner or later call force majeure. “If they don’t, they are at some point going to pay the liability for that legally, and that’s their choice,” Saad al-Kaabi remarked.

Indian officials have claimed that the country has reserves to tide over supply disruptions for 50 days – 25 days each of crude and petroleum products. But this is to be evaluated with some scepticism.

The price of the global benchmark, Brent crude, which was USD 73.28 per barrel at its peak a day before the war (on February 27), rose to USD 92.69 on March 6, an increase of a whopping 26.5 per per cent in a week. This was the second biggest weekly spike in history. More may be yet be in store.

Gulf states find room for manoeuvre

A report in the Financial Times on March 6 quoted a Gulf state official as saying that three of four states in the region (without naming the countries) – Saudi Arabia, the UAE, Kuwait and Qatar – as jointly discussing the strain on their budgets. It quoted the official as saying that the meeting considered whether “force majeure clauses can be invoked in current contracts, while also reviewing current and future investment commitments in order to alleviate some of the anticipated economic strain from the current war”. Potential investment pledges to foreign states or private companies, sports sponsorships, contracts with businesses and investors, or sales of holdings could all be in jeopardy as a result.

An oil price surge – especially one with an uncertain timeline – could have the effect of squeezing the margins of Indian refineries

The same Financial Times report also quoted Khalaf al-Habtoor, a prominent investor from the Emirates, as asking Trump on X: “A direct question: Who gave you the authority to drag our region into a war with #Iran? And on what basis did you make this dangerous decision?” “Did you calculate the collateral damage before pulling the trigger?” The Gulf countries, he said, “have the right to ask today: where did this money go? Are we funding peace initiatives or funding a war that exposes us to danger?”

Petroleum reserves in the wake of uncertain supplies

Indian officials have claimed that the country has reserves to tide over supply disruptions for 50 days – 25 days each of crude and petroleum products. But this is to be evaluated with some scepticism. First, national authorities tend to portray a more optimistic scenario because they are wary of potential price volatilities if a shortage is projected sooner rather than later.

Second, the absolute reserve is often merely a theoretical limit, one that is not physically achievable. For instance, although the US has a strategic reserve capacity of 714 million barrels, it now has only 415 million barrels – enough to last 20 days. Moreover, a complete drawdown is physically impossible without causing costly structural damage to the facilities. Current American reserves are at the same level as in the early 1980s, implyingthey will have no meaningful role in stabilising fuel prices.

Also read: Strait of Hormuz closure: India's 100 mn barrel crude stocks could cover 40-45 days

Although China is said to have reserves that are good enough to last about 100-120 days, its case is somewhat different. First, it has a well-diversified base for sourcing crude oil imports, of which half comes from countries (including Iran) using the Strait of Hormuz; the other sources are well distributed, implying that risk is diversified. Second, since oil imports account for 59 per cent of all energy imports, but since overall energy imports account for only 15.4 per cent of overall Chinese energy consumption, China’s dependence on imports is much lower. The rapid strides made in the solar and electric vehicles space are emblematic of this growing self-reliance.

The unprecedented insurance logjam

On March 1, a day after hostilities commenced, satellite tracking services showed four super tankers passed through the Strait of Hormuz, compared to 22 a day earlier. Traffic in the Strait of Hormuz halted even before a single shot was fired, simply because the global shipping insurance industry called for a halt to shipping. It did this because it had no precedent for assessing the risk this time in the Persian Gulf.

By March 2, seven of the 12 International Group of Protection and Indemnity Clubs (IGPIC) gave 72 hours’ notice of cancellation of war risk insurance coverage to all shipping in the Persian Gulf, the Gulf of Oman and in Iran’s territorial waters. This London-based non-profit provides marine liability coverage for 90 per cent of the world’s ocean-faring cargoes. This body pools resources to cover risks above an individual member’s threshold and also organises reinsurance to cover higher liabilities.

Also read: Strait of Hormuz crisis: How insurers, not missiles, shut down world’s oil artery

Below the Clubs are the handful of London-based reinsurers who cover the risk that individual Clubs cannot bear. And, further down the chain are the retrocession markets, effectively a reinsurance for reinsurers, where the reinsurers park the risk they bear onto market-based instruments such as insurance-linked securities or catastrophe bonds, whose outstanding value is in the region of USD 120 billion. The critical point to note is that these securities are exclusively meant for insurance against hurricanes, floods, wildfires, earthquakes and other such natural calamities, not war.

Traffic in the Strait of Hormuz halted even before a single shot was fired, simply because the global shipping insurance industry called for a halt to shipping

So, when the seven Clubs cancelled war insurance coverage in March, it meant zero insurance for all cargoes transiting the Strait of Hormuz. Shanaka Anslem Perera, an analyst based in Sri Lanka, has pointed out recently in a blog post that without cover provided by the Clubs, “no port will accept them (the vessels), no cargo owner will load them, no bank will finance the voyage, no charterer will contract them. The vessel becomes a commercially unviable object adrift in a system that runs entirely on institutional trust.”

Trump’s offer of a US backstop lacks credibility

Trump’s recent announcement on his favoured social media channel Truth Social about the US Development Finance Corporation providing insurance “at a very favourable price…for ALL Maritime Trade, especially energy, travelling through the Gulf,” has drawn only scepticism from market participants. The Financial Times reported one broker as saying that there has been no follow-up to the Truth Social post. The broker also remained sceptical of how broad the US umbrella of support would cover.

Perera observed that the maritime insurance market’s coverage of the rapidly escalating war zone collapsed not because of an actual attack but because it was impossible to estimate the risk. It was “withdrawn because the cost of verifying whether any particular vessel will survive any particular transit now exceeds the premium income from insuring that transit,” he observed. “When risk cannot be modelled, it cannot be priced. When it cannot be priced, cover is withdrawn. When cover is withdrawn, the system freezes regardless of whether the underlying risk has materialised for any specific vessel.”

Also read: Iran war stalls trade, threatens global supply chains; 3,200 ships idle inside Persian Gulf

Perera, almost anticipating Trump’s claim of acting to revive the maritime trade insurance, observed, “Governments cannot rapidly backstop insurance markets because the legislative and administrative machinery is not designed for maritime war risk at global scale.”

Although the US Maritime Administration has the power to set caps on insurance during wartime, they require to meet two conditions: presidential assent and, more importantly, they only apply to US carriers. Since the US has an almost negligible share of the fleet strength there is very little that Trump can enforce on insurers. What this essentially means is that the financial markets and their architecture, not the global political or institutional architecture, determine how trade flows.

Perera estimates that contrary to what the market seems to have currently factored – a four to eight week-long disruption in supplies through the Strait of Hormuz – full reinstatement of insurance will take much longer: between six and eighteen months.

A crisis that envelops much more than oil markets

But oil and energy imports are only one set of problems that the war poses. Fertiliser prices are set to soar just ahead of the planting season, just as they did after the Russian invasion of Ukraine. This is not just because Iran is itself a leading producer of urea but also because about one-third of the world’s urea traverses through the Hormuz. And, unlike crude oil, there are no strategic reserves of fertilisers.

Also read: Strait of Hormuz gridlock: India braces for energy shock as global oil flows freeze

Indian vulnerability is compounded by the fact that while it is import-dependent for up to almost 90 per cent of its crude oil requirements, it also has surplus capacity in terms of refining, which has contributed about 15-20 per cent of its total merchandise exports in recent years. The latter, in a sense, therefore cushions the burden of imports. An oil price surge – especially one with an uncertain timeline – could have the effect of squeezing the margins of Indian refineries.

Indian refiners likely to come under pressure

Moreover, the physical characteristics of the Iranian crude, which enable blending with other crudes so that refineries can process a wider range of products that translate into better profitability, means the possible suboptimal use of refining capacities in India. The recent report that Mangalore Refineries and Petrochemicals Ltd has shut down one of its three distillation units suggests that a problem of both quantity and quality may be at play in the crisis.

The 30-day “waiver” of Russian crude oil purchases from Trump’s punitive tariffs is unlikely to offer any immediate material comfort. Just look at it from Russia’s point of view: would it prefer to sell oil at a discounted price to India for a limited period of 30 days when China positions itself as a more reliable and durable trading partner for its oil?

Also read: Indian refiners buy Russian oil from tankers stranded at sea

The immediate transmission of the crisis, via the rupee’s exchange rate with the dollar, poses additional stresses on not just the balance of payments but also domestic inflation. The RBI’s monetary policy’s commitment to at least hold interest rates could also come under pressure. The increase in LPG prices announced on March 6 is just the initial spark.

Additionally, the collapse of the Gulf as a major source of remittances to India adds to the pressures. In 2024-25, remittances amounted to USD 135.4 billion, of which 40 per cent came from the Gulf Cooperation Council countries. Put another way, remittances from the Gulf takes care of about half of India’s current account. To aggravate matters, the region is a major market for not just primary commodities such as rice, vegetables, textiles or tea but also high-value products like electronics and engineering goods.

A crisis aggravated by Trump’s war on trade

Happenings in the petroleum markets are just the first-order effects. As the war prolongs, it will envelop many more aspects of international trade. For instance, Craig Tindale, an Australian investment analyst who recently wrote a paper on critical materials that attracted the attention of the White House, points out that crude oil, but also, products like sulphur and sulphuric acid could cause a logjam in production systems apparently far-removed from petroleum.

The immediate transmission of the crisis, via the rupee’s exchange rate with the dollar, poses additional stresses on not just the balance of payments but also domestic inflation

In a blog post of March 5, Tindale argues, “The loss of sour crude becomes a sulphur and sulphuric acid crisis; that chemical crisis becomes a copper and cobalt crisis; the metals crisis becomes a transformer, switchgear, and grid crisis; the grid crisis becomes a semiconductor crisis; and the semiconductor crisis becomes a compute and data-centre crisis.”

Russian oil, a ray of hope that the Modi-Trump deal is in limbo?

The fact that the war on Iran comes after Trump’s onslaught on global production chains means that countries are now forced to search for a few degrees of freedom to escape the imperial embrace. Maybe that is what has prompted Prime Minister Modi to explore the possibilities of escaping the lopsided provisions of the Indo-US trade deal, details of which remain mired in murk.

Trump’s apparent “waiver” of the provision barring Indian imports of oil from Russia – we do not know yet whether it was meant to be a face-saver for Trump or Modi – offers some hope, even if later found to be misplaced, in these bleak times when innocents are being slaughtered in the name of liberty.