Iran’s parliament just passed a new $1 billion plan. This ruling opens the door for Iran to close the Strait of Hormuz, the only maritime passageway from the Persian Gulf to the world’s oceans. If implemented, this would be a dramatic retreat from the punitive U.S. strike on Iranian nuclear sites that escalated tensions in a region already on edge. Anti-Iran experts predict that cutting the oil exports would deal a devastating blow to Iran. It will have an impact on its now-permanent neighbors and rivals Saudi Arabia, the United Arab Emirates, Kuwait, and Qatar.
The perennially tense Strait of Hormuz is the world’s chokepoint for oil transport. As much as 20% of the world’s oil flows through this narrow waterway. It’s often used to justify the movement of an estimated 20 million barrels of oil and oil products daily. A long-lasting closure would cut off these valuable flows and trigger major economic fallout that would be felt around the globe.
Iran’s supreme national security council is at an important crossroads. They need to take great care to properly think through the repercussions of such an extreme step. Should Iran proceed with a blockade, experts suggest it may employ small boats for a partial blockade or mine the waterway for a more extensive disruption.
The effects of shutting down the Strait of Hormuz stretches far outside Iran’s territory. Pipelines from Saudi Arabia and the UAE have less than 2.6 mbpd of spare capacity. This lack of availability greatly complicates these countries’ efforts to replace lost maritime routes. Goldman Sachs’ analysis paints a truly horrifying picture. If oil flows through the strait reduce in half for a single month and then fall 10% over the following eleven months, it would send Brent crude prices up to around $110 per barrel.
Such a move would further alienate Iran from its new oil-producing neighbors. This situation would likely further inflame hostilities and increase tensions. The political repercussions will reverberate throughout the Middle East. It will send tremors across Asia, Europe and North America, especially in the sphere of global trade. Qatar’s liquefied natural gas (LNG) exports account for roughly 20% of the global supply. Should disruptions occur, we find that U.S. pump prices could spike to $3.35 to $3.50 per gallon.
Iran’s closure of the Strait of Hormuz would spark escalatory responses in its main market in Asia, especially China. As the largest importer of Iranian oil, China has a strong interest in ensuring stable and predictable oil flows from the Gulf region.
Aside from growing tensions, U.S.-associated vessels have been able to transit through the Strait without further incident. Analysts view this as a really encouraging sign looking ahead in the short term. The Joint Maritime Information Center stated,
“U.S. associated vessels have successfully transited the Strait of Hormuz without interruption, which is a positive sign for the immediate future.”
Experts caution that Iran’s operations around the strait are nuanced and exist on a spectrum. Total closure doesn’t have to be the only outcome, and a lot more can happen between here and there. According to Signum’s Bishop,
“Iran’s operations in and around Hormuz are unlikely to be ‘all or nothing’ – but instead move along a sliding scale from total disruption to none at all.”
New overland supply routes for Middle Eastern oil and gas would be much longer and more vulnerable. The Commonwealth Bank of Australia notes that there is “limited scope to bypass the Strait of Hormuz.” In addition, S&P highlights that pipeline capacities are inadequate to make up potential maritime disruptions via connected waterways.
Vanda Hari, an independent energy market analyst, pointed to a big risk. She cautioned that Iran would be doing significant self-harm if it were to pursue plans to close this key waterway.
“So very, very little to be achieved, and a lot of self-inflicted harm that Iran could do.”
Iran might instead seek to generate just enough disruption to drive up global oil prices. Simultaneously, they will need to avoid engagement in any direct combat with U.S. military forces. According to Bishop,
“The best strategy [for Iran] would be to rattle Hormuz oil flows just enough to hurt the U.S. via moderate upward price movement, but not enough to provoke a major U.S. response against Iran’s oil production and export capacity.”
Clayton Seigle provided some excellent background on Iran’s national security interests in promoting stability throughout the region.
“Its national security interest really would value stabilization of the situation and a de-escalation enabling safe flows of oil and gas through the strait.”