It's the politics, stupid: Political, not economic, dynamics to derisk supply chains is what India needs

The US-Israel war on Iran has created a new geopolitical schism between those dependent and not-so-dependent on West Asian energy resources. The way missiles of disruption have pierced through the geopolitical terrain, India, China, Japan and South Korea find themselves on one side of the picture, and the West on the other.

This is Supply Chain Politics 2.0. Between Japan at the highest end of the spectrum and China at the lowest, broad estimates suggest that these four big Asian economies account for 40-70% traffic passing through the Strait of Hormuz. In comparison, the US and Europe have less dependency. In fact, US LNG exports have risen significantly to fill the shortage from Qatar.

On the price front, this is a consequence of a supply link being choked for political, not economic, reasons. Prices will drop the moment there's headway in talks, or Hormuz is thrown open. But that doesn't mean the need to derisk and diversify will go away. Political dynamics informing disruption of supply chains for projecting and exerting power won't change.

When the US first built pressure on the Malacca Strait - through which 80% of China's oil imports pass - Beijing embarked on a massive diversification effort. It has been partially successful because while much of the imports still come through the Malacca Strait, alternatives by way of oil pipelines from Central Asian countries, gas pipeline from Myanmar and coal gasification projects, besides shift to renewables, have reduced dependency.



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The Hormuz trap is, however, quite different from the Malacca dilemma. The same China has a different conundrum here. When Beijing built its political heft to take on Washington, it also took a call against honouring US-led energy sanctions. So, it accessed Iranian, Venezuelan and Russian oil while others, including India, stayed off to avoid exposure.

As a result, China as the only big buyer dictated prices in the 'sanctioned' oil market, particularly Iran. These were obviously much cheaper than market prices, which is how Beijing built its strategic reserves. The attack on Iran has driven up costs for Beijing, which has had to introduce a price cap to keep oil costs affordable at the pump. With sanctions temporarily lifted on Russian and Iranian oil, other buyers, too, have entered the fray to end the Chinese monopoly.

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India is somewhere in the middle. For one, it has managed to keep prices at the pump stable, and essential LPG available. While all bets will be on matters to ease up on the Iran war, it's the longer-term political derisking - both international and domestic - that needs attention.

For starters, India will need to align itself faster, first with the derisking process underway within the Gulf itself, a trend that will continue regardless of the war's outcome.

Unlike Malacca, all littoral states of Hormuz are oil/gas-producing countries. Their own economies, including Iran, are dependent on the Hormuz staying open. And, in this context, the second schism between Iran and the Gulf countries that has deepened because of the war gains special importance.

Saudi Arabia is doubling down on its Red Sea alternative through the Yanbu port. While the 1,200 km east-west oil pipeline to the port is still not a substitute for Hormuz, it's safe to assume that Riyadh will look to build options. Similarly, the UAE's focus is on Fujairah port on its east coast located outside the Persian Gulf.

Then there's the future of Iranian oil in case sanctions are permanently removed. Easiest diversification of sale for Iran from a dominant China will be to India. So, broadly, India will have to work with each of these countries separately, in sync with their respective diversification-derisking strategies without coming into clash with either.

Besides this, options reworking gas deals with the US and Canada, as well as doing the tough balance on Russia to access its oil, will be important. Importantly, India is yet to have any viable trans-border pipelines as an option, which makes diversification that much more difficult.

On the domestic front, focus on better use of India's coal reserves, particularly for gasification, will have to take priority. Here, the Indian story lost its way between 2009 and 2012, the time China was working closely with South African company Sasol, pioneer in this technology, with plans to set up two coal gas plants in northwestern China.

Tata Group also had a similar deal with Sasol. But that fell through amid regulatory clearances and cost concerns after another round of oil price volatility had settled. China, on its part, engaged closely with Sasol between 2006 and 2011, through technology cooperation agreements.

But in due course, it shed Sasol from the partnership and repurposed the knowhow to build its own technologies to make synthetic gas from coal. Over the past 15 yrs, China has emerged as a leader in gasification technology, which has gone through many iterations since its early days with Sasol. India needs that technology now to fire up its gasification plans, which is where the relaxation in 'Press Note 3' norms may help.

The political test, however, will be to translate these on ground even if oil-gas prices were to drop or stabilise. In the new wars that weaponise supply chains, it's not the quantum of availability of resources, but power to access them through diverse ways in any crisis that will make the difference between those who make good, and those who settle.