Trump Drops 20% Strait of Hormuz Fee: UNCLOS, Transit Passage and India's Oil Security

The original proposal: In a social media post, the US President declared that the United States would act as the guardian of the Strait of Hormuz and levy a fee at the rate of 20 per cent on all cargo shipped through the waterway, framed as reimbursement for the costs incurred by American forces in keeping the strait safe amid the conflict with Iran. The announcement followed weeks in which the US military said its strikes were aimed at degrading Iran's ability to attack commercial shipping in the strait.

The design problem: The proposal immediately ran into a basic ambiguity — 20 per cent of what? If computed on the total value of cargo on board, the levy would be exorbitant: actual shipping costs are normally a small fraction of cargo value, so a value-based toll would drastically inflate the landed cost of oil, gas and other goods. If computed on the costs incurred by US forces, there was no clarity on how such costs would be apportioned per vessel. No mechanism, collection agency or legal basis was specified.

The legal objection: The International Maritime Organization, the UN's specialised agency for shipping, signalled that it has consistently opposed fees for passage through straits used for international navigation, and that there is no basis in international law for mandatory tolls merely to transit a strait. The US itself has traditionally been the world's most vocal champion of freedom of navigation, and had strongly opposed Iran's own moves to charge tolls in the same waterway — making the proposal a reversal of Washington's long-held position.

The rollback: Within days, the President announced that, after conversations with Middle East leaders, the fee would be replaced by large trade and investment commitments by Gulf states in the United States. Analysts note that Gulf states — the biggest users of the strait as energy exporters — had strong reasons to lobby against a levy that would tax their own exports, and that the fee's potential impact on global energy and shipping markets weighed on the decision. The precise scale and novelty of the promised investments remain unclear.

Geography: The Strait of Hormuz is the narrow waterway connecting the Persian Gulf with the Gulf of Oman and the Arabian Sea. It lies between Iran to the north and Oman's Musandam Peninsula (an exclave of Oman) and the UAE to the south. At its narrowest, the strait is only about 21 nautical miles (roughly 39 km) wide, and the navigable shipping lanes are far narrower — inbound and outbound lanes of about two miles each, separated by a buffer zone, under an internationally recognised traffic separation scheme.

Energy significance: Roughly one-fifth of the world's oil — around 20 million barrels per day of crude and petroleum products — normally moves through the strait, along with a comparable share of global liquefied natural gas trade, chiefly from Qatar. The strait is the sole maritime outlet for the oil and gas exports of Gulf producers such as Saudi Arabia (largely), Iraq, Kuwait, Qatar, Bahrain, the UAE (partly) and Iran itself. Because no pipeline network can fully substitute for it, it is universally described as the world's most important energy chokepoint.

Why chokepoints matter: Chokepoints are narrow channels on widely used sea routes — Hormuz, the Strait of Malacca, Bab-el-Mandeb, the Suez Canal, the Panama Canal and others. Disruption at any of them raises freight rates, war-risk insurance premiums and delivery times worldwide, transmitting shocks to energy prices and inflation far beyond the region.

Free navigation before the war: Until the US–Iran war broke out in late February 2026, the Strait of Hormuz was free for navigation in line with long-standing international practice. Since then, Iran has asserted claims of sovereignty over parts of the narrow waterway between itself and Oman and has sought to convert its geographical position into leverage.

Iran's route regime: Iran actively regulated the flow of vessels through the strait during the war. Under the June Memorandum of Understanding with the US, it continued to insist that vessels cross only through routings designated by Tehran, after seeking its permission, and indicated it would impose its own service fee for transits at a later date. Iranian forces have attacked vessels sailing outside the lanes authorised by Tehran. In response, many operators — reportedly encouraged by the US — have taken routes hugging Oman's coastline as an alternative to the Tehran-designated lanes. Differing interpretations of the MoU and the vagueness of its terms have emerged as recurring flashpoints.

The interim pact and its fragility: The interim pact signed on 17 June 2026 promised to reopen the strait, and transits rose from a shutdown to about 90 vessels by 24 June, averaging between 40 and 50 on most days — still well below the pre-war range of 120 to 140 daily transits. The pact set a 60-day negotiating window for a final accord that was also meant to address Iran's nuclear programme. However, escalation resumed: Iranian strikes on tankers and on targets in Gulf countries, US strikes on Iranian military assets, Iran's weekend announcement closing the strait to commercial vessels, and the US decision to reinstate a naval blockade on Iran-linked shipping have all placed the deal in jeopardy.

The contest in essence: Behind the flip-flop on fees lies a deeper battle between Iran and the US over who effectively controls the Strait of Hormuz — Iran through route designation, permissions and threats of closure; the US through naval power, strikes and, briefly, the proposed toll. Both approaches sit uneasily with the international legal regime governing straits.

Straits versus canals: A fundamental legal distinction exists between man-made waterways and natural straits. Canals such as the Suez Canal and the Panama Canal are artificial channels lying within the territory of a single state, which lawfully charges tolls for their use under specific treaty regimes. Straits, by contrast, are natural waterways, and international law generally prohibits charging ships merely for passing through them; coastal states may levy charges only for specific services actually rendered to a ship, such as pilotage or towage.

UNCLOS and transit passage: The United Nations Convention on the Law of the Sea (UNCLOS), 1982 — often called the constitution of the oceans — codifies the regime of transit passage for straits used for international navigation that connect one part of the high seas or an exclusive economic zone with another. Under this regime, all ships and aircraft enjoy the right of continuous and expeditious transit, which the bordering states cannot suspend or hamper; this is a stronger right than ordinary innocent passage through the territorial sea, which can be temporarily suspended for security reasons and does not cover overflight or submerged transit.

Application to Hormuz: Because the strait at its narrowest lies entirely within the territorial seas of Iran and Oman, the transit passage regime is what keeps it legally open to the world's shipping. Notably, Iran has signed but not ratified UNCLOS, and the United States has not ratified it either — yet transit passage through Hormuz is widely accepted as reflecting customary international law binding on all states. Iran's insistence on prior permission and designated routes, its planned transit fee, and the proposed American toll would each have been difficult to reconcile with this regime — which is why the IMO and maritime law experts objected to tolls by any party.

India's stake in the legal regime: India, which ratified UNCLOS in 1995, consistently supports freedom of navigation and a rules-based maritime order — positions it articulates in the Indo-Pacific context as well. The erosion of the transit passage regime in one strait sets precedents that could affect other waterways critical to Indian trade, such as the Strait of Malacca.

The landed cost arithmetic: The price an Indian refiner finally pays for imported crude includes the commodity's price plus freight and insurance. A 20 per cent levy computed on cargo value at an oil price of $75 per barrel would have added about $15 per barrel, taking the landed price of Hormuz-routed crude to well over $90 per barrel — before counting the elevated war-risk insurance premiums and freight charges that the West Asia conflict has already imposed on vessels in the region.

The macro impact: India imports roughly 1.8 to 2 billion barrels of crude oil a year, and every $1-per-barrel increase in oil prices raises the country's oil import bill by up to $2 billion on an annualised basis. Assuming about 30 per cent of India's oil imports transit the Strait of Hormuz, a 20 per cent fee at $75 oil would have translated into an additional cost of around $9 billion annualised for oil alone — with LNG, LPG, fertilisers and industrial inputs imported through the same waterway adding further to the burden.

The strategic dilemma: Beyond costs, the fee would have effectively forced shipping players to pick a side — arranging transit either with the US or with Iran — and vessels aligned with one could have faced risk of being targeted by the other. For a country like India, which maintains working relationships with the US, the Gulf states and Iran alike, such a forced choice would have been diplomatically and commercially fraught.

Import dependence: India is the world's third-largest oil consumer and imports more than 85 per cent of its crude oil requirement and about half of its natural gas needs. A large share of its crude — from Iraq, Saudi Arabia, the UAE and Kuwait — and the bulk of its LNG, sourced principally from Qatar under long-term contracts, transits the Strait of Hormuz, making the waterway a lifeline of the Indian economy.

Diversification of sources: India has consciously diversified its crude basket across more than three dozen countries — including Russia (whose share rose sharply after 2022), the United States, West Africa and Latin America — precisely to reduce the impact of a disruption at any single chokepoint. Long-term LNG agreements, including the extension of the Qatar contract in 2024, balance security of supply with price stability.

Strategic Petroleum Reserves: India maintains Strategic Petroleum Reserves (SPR) of about 5.33 million tonnes of crude in underground rock caverns at Visakhapatnam, Mangaluru and Padur, operated by Indian Strategic Petroleum Reserves Limited (ISPRL), with a second phase approved at Chandikhol (Odisha) and Padur. Together with refiners' commercial stocks, these reserves provide a buffer of several weeks of import cover during supply shocks.

Naval protection of sea lanes: Since the 2019 tanker attacks in the Gulf of Oman, the Indian Navy has run Operation Sankalp, escorting Indian-flagged vessels through the Persian Gulf and the Gulf of Oman — a mission that acquires renewed salience in the current crisis. India also invests in connectivity that bypasses chokepoints and volatile routes, including the Chabahar port in Iran, the International North–South Transport Corridor (INSTC), and the proposed India–Middle East–Europe Economic Corridor (IMEC).

The Hormuz episode carries three lessons. First, the sanctity of the transit passage regime must be preserved: whether tolls are proposed by a strait's coastal state or by an external security provider, monetising or conditioning passage through international straits corrodes a legal order on which every trading nation — India most of all — depends. Second, for India, the crisis reinforces the imperative of deepening energy resilience: faster expansion of Strategic Petroleum Reserves, continued diversification of crude and LNG sources and routes, hedging through long-term contracts, and accelerating the domestic transition to renewables, biofuels and green hydrogen that structurally reduces import dependence. Third, diplomatically, India's interest lies in de-escalation and a negotiated settlement between the US and Iran; with working relationships across Washington, Tehran and the Gulf capitals, New Delhi can quietly support dialogue, insist on freedom of navigation in multilateral forums such as the IMO, and continue naval missions like Operation Sankalp that protect its seaborne commerce. Energy security, as this episode shows, is inseparable from maritime law, naval capability and diplomacy.