Strait of Hormuz Transit Fee: Why US Dropped 20% Levy

Why in News?

US President Donald Trump withdrew his proposal to impose a 20% reimbursement fee on commercial cargo transiting the Strait of Hormuz, just one day after announcing it. The proposed fee was replaced with prospective trade and investment deals with Gulf countries after concerns emerged over its legality, calculation, enforcement and impact on global shipping and energy-importing countries such as India.

What was the Proposed Transit Fee?

• The US President had announced that the United States would become the “Guardian of the Hormuz Strait” and provide security to commercial vessels.
• In return, the US proposed a 20% reimbursement fee on all cargo shipped through the Strait.
• The stated purpose was to recover the cost incurred by American forces in securing navigation through the strategically important waterway.

However, the announcement did not explain:

• The basis for calculating the fee
• The authority responsible for collecting it
• The vessels or cargo to which it would apply
• The method of enforcement
• The security guarantee offered in return
• The President later announced that the proposed fee would be replaced with trade and investment commitments from Gulf countries.

Why was the Proposal Unworkable?

Calculation Ambiguity

The announcement did not clarify whether the 20% fee would be calculated on:

• The total value of cargo
• The cost incurred by the US military
• Freight and insurance charges
• Some other formula

If imposed on the total cargo value, the fee would have been far higher than normal shipping costs and would have sharply raised the landed price of energy and other commodities.

Lack of Enforcement Mechanism

• The proposal did not explain how the US would collect the levy from vessels belonging to different countries.
• Imposing such a charge would have required control over vessel movements, shipping routes, ports, insurers and payment systems.

Doubtful Security Guarantee

• The US justified the levy as payment for providing safe passage. However, its response to Iranian attacks on vessels had mainly been retaliatory.
• The absence of pre-emptive protection raised doubts over whether Washington could guarantee uninterrupted and secure commercial navigation.

Impact on Global Energy Markets

Before the conflict, the Strait of Hormuz carried nearly one-fifth of global oil and LNG flows.

A 20% levy could have raised:

• Crude oil prices
• LNG and LPG costs
• Shipping charges
• War-risk insurance premiums
• Fertiliser and industrial-input prices

It could therefore have affected global inflation and trade.

International Legal Position

• The International Maritime Organization opposed the proposed fee.
• It maintained that there was no legal basis for imposing mandatory tolls merely for transiting a strait used for international navigation.

Position under UNCLOS

• The United Nations Convention on the Law of the Sea recognises transit passage through international straits.
• Natural waterways such as the Strait of Hormuz generally do not carry a mandatory transit fee, unlike artificial waterways such as:
• Suez Canal
• Panama Canal
• Charges may be imposed for specific services supplied to vessels, but not merely for passage through an international strait.
• Neither the US nor Iran has ratified UNCLOS. However, several of its navigational principles are widely accepted as customary international law.

Contradiction with the US Position

• The US has traditionally supported freedom of navigation and opposed Iranian attempts to regulate or charge vessels passing through Hormuz.
• The proposed American levy contradicted this long-standing position and could have strengthened Iran’s argument that it too had the right to impose tolls.

US–Iran Contest over the Strait

The fee controversy reflects a deeper struggle between the US and Iran over control of the Strait of Hormuz.

Interim US–Iran Pact

An interim agreement signed on June 17, 2026, aimed to reopen the Strait.

Following the agreement:

• Vessel movements increased
• Transits crossed 90 on June 24
• Average daily movements remained around 40–50 on several days

However, this remained below the pre-war level of up to 140 daily vessel transits.

Renewed tensions later caused movements to fall to their lowest level in nearly a month.

Iran’s Position

Iran claimed that it had always been the guardian of the Strait and argued that whoever provided secure passage could seek compensation.

However, Iran’s Foreign Minister described the proposed 20% rate as excessive.

Since the conflict began in February 2026, Iran has:

• Asserted sovereignty over parts of the Strait
• Directed vessels to use Tehran-authorised routes
• Targeted vessels using unauthorised lanes
• Proposed a service fee for transit
• Temporarily closed the Strait to commercial shipping

US Position

• The US rejected Iran’s control over maritime traffic and encouraged vessels to use routes closer to Oman’s coastline.
• It also conducted strikes against Iranian military targets in response to attacks on commercial vessels.
• The conflicting interpretation of the June agreement became a major source of renewed tension.

Strategic Importance of the Strait of Hormuz

• The Strait of Hormuz is a narrow maritime passage between Iran and Oman connecting the Persian Gulf with the Gulf of Oman and the Arabian Sea.
• It is one of the world’s most important energy chokepoints because major West Asian oil and gas exporters depend on it.

Disruption affects:

• Global crude oil supply
• LNG and LPG shipments
• Shipping and insurance costs
• Energy-importing economies
• Inflation and industrial production

The imposition of competing US and Iranian fees could also have forced shipping companies to choose one side, increasing the risk of retaliatory targeting.

Why the Proposal Mattered for India

India is highly dependent on imported energy transported through the Strait of Hormuz.

Dependence on West Asian Supplies

Approximately:

• 40% of India’s crude oil imports
• 60% of its LNG imports
• 90% of its LPG imports

come from West Asia through the Strait.

India’s overall import dependence is more than:

• 88% for crude oil
• 60% for LPG
• About 50% for natural gas

This makes India particularly vulnerable to disruption or additional transit costs.

Possible Rise in Crude Oil Costs

• If crude oil were priced at USD 75 per barrel, a 20% fee would add USD 15, pushing the landed cost to more than USD 90 per barrel after freight and insurance.
• India imports approximately 1.8–2 billion barrels of crude oil annually.
• Every USD 1 increase per barrel can raise India’s annual oil import bill by up to USD 2 billion.

Estimated Additional Burden

Assuming that 30% of India’s oil imports continued to pass through Hormuz, the fee could have added approximately USD 9 billion annually to India’s crude oil import bill.

This estimate excludes the additional burden on:

• LNG
• LPG
• Fertilisers
• Petrochemicals
• Industrial inputs

The actual economic cost could therefore have been considerably higher.

India’s Response to the Crisis

• India has consistently maintained that international waterways such as the Strait of Hormuz should remain free and accessible to all vessels.

Diversification of Crude Oil Sources

Diversified sourcing helped India maintain adequate crude oil supplies during the crisis.

However, diversification could not fully insulate India from:

• Higher international prices
• Increased freight costs
• War-risk insurance premiums
• LNG and LPG supply constraints

Gas Rationing

The government rationed gas supplies to certain industries and commercial consumers to ensure availability for:

• Households
• Priority sectors
• Essential services

Some restrictions were relaxed after the June agreement improved vessel movements.

Measures against Panic Buying

• Emergency measures were introduced to discourage panic buying and maintain public confidence in domestic fuel availability.

Supply Security over Price

• India prioritised energy availability over cost.
• Its oil imports during March–May 2026 increased by 47% year-on-year to USD 48.88 billion, according to provisional data from the Ministry of Petroleum and Natural Gas.

Wider Economic Consequences for India

Higher energy prices affect the wider economy through several channels.

Trade Balance

Oil, gas and other energy products constitute a major part of India’s imports. Higher costs widen the merchandise trade deficit.

Current Account Deficit

A larger energy import bill can increase the current account deficit unless compensated by stronger exports or capital inflows.

Inflation

Higher crude prices raise the cost of:

• Petrol and diesel
• Transportation
• Fertilisers
• Electricity
• Industrial production
• Food distribution

This can produce wider inflationary pressures.

Rupee Exchange Rate

Higher demand for dollars to pay for energy imports may weaken the rupee.

Currency depreciation can further increase the domestic cost of imported energy.

Fiscal Pressure

If the government or oil-marketing companies absorb part of the price increase, it may create pressure on subsidies, taxation and public finances.

Way Forward

Protect Freedom of Navigation

• India should continue to support unrestricted and non-discriminatory passage through international waterways in accordance with international law.

Diversify Energy Sources

India should expand sourcing from:

• Russia, United States,Africa,Latin America,Other non-Hormuz suppliers

Long-term contracts and flexible supply arrangements can reduce concentration risks.

Strengthen Strategic Reserves

Larger strategic petroleum reserves can provide temporary protection during major supply disruptions.

Expand Alternative Energy

Reducing dependence on imported hydrocarbons requires faster expansion of:

• Renewable energy
• Green hydrogen
• Biofuels
• Electric mobility
• Domestic natural-gas production

Improve Maritime Risk Preparedness

India should strengthen coordination among:

• Navy
• Shipping companies
• Energy importers
• Insurers
• Ports
• Diplomatic missions

This can support vessel tracking, risk assessment and emergency rerouting.

Build Supply-Chain Resilience

Long-term resilience requires diversified transport routes, storage capacity and agreements with multiple suppliers.

Diplomatic Engagement

India should maintain dialogue with the US, Iran, Oman and Gulf countries to promote de-escalation and uninterrupted commercial navigation.

Conclusion

The reversal of the proposed 20% Hormuz fee exposed the legal, diplomatic and economic limits of unilaterally taxing an international maritime strait. For India, the episode demonstrates the vulnerability created by heavy dependence on West Asian energy supplies. Continued support for freedom of navigation, diversified sourcing, strategic reserves and faster energy transition are essential to protect India’s economy from geopolitical disruptions and strengthen long-term energy security.