Iran’s majlis has passed a government budget plan that envisions closing the Strait of Hormuz within three years. This strategic waterway serves as the choke point between the Persian Gulf and Gulf of Oman. This flawed decision poses a serious risk of big-time oil supply shocks. The Strait is the sole arterial shipping lane for Asian and European-bound energy exports from Middle Eastern heavyweights Saudi Arabia, the United Arab Emirates, Iraq, Kuwait, and Bahrain.
Iran’s supreme national security council would make the final decision on the closure, he emphasized. They will want to weigh geopolitical considerations in the midst of an ongoing Iranian-Israeli war. Given increasing tensions in the region, investors were especially focused on this development. The Strait of Hormuz, for instance, is an important chokepoint for about 20% of the world’s oil supply. If it were ever to close, it would present an existential threat to global energy markets.
Oil prices came under sharp downward pressure last week on concerns that Iran would follow through on the plan. Things quickly became dramatic as everyone wondered whether supply would hold out. May’s production of 3.3 million bpd is noted in OPEC’s monthly oil market report. The strait is vital not only for Iranian exports, but for other regional heavyweights as well.
In an excellent take-down of the consequences of a shutdown, analysts at Barclays provided some eye-opening details. They noted, “The potential closure of the Strait of Hormuz remains a tail risk in our view, but we maintain that oil prices would race past $100/b in such a scenario, due to limited avenues to bypass the narrow passage and the constraints it would pose to the marketability of spare capacity.”
Despite these concerns, Barclays analysts observed that “the threat of wider regional conflagration did not materialize despite the US action against Iranian nuclear sites.” This is positive news, indicating that even though tensions are high, the most catastrophic scenarios in the near term might be less likely.
A long closure would enormously impact our nation’s oil supply chain. This would affect not only Iranian shipments, but ones from other bordering countries that depend on this important waterway. Saudi Arabia is the world’s largest crude exporter. Should the strait be closed, it would encounter extremely taxing logistical hurdles, as would other Gulf states such as the United Arab Emirates and Kuwait.