Iran: Is the cost of closing the Strait of Hormuz too high?
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Diverging Reports Breakdown
Fragile Iran-Israel ceasefire calms oil markets
Oil prices hit a five-month high over the weekend after the United States struck Iran’s nuclear facilities. Tehran retaliated with an attack on the US Al Udeid Air Base in Qatar. But oil prices dropped sharply on Tuesday after it appeared that Iran was holding off further attacks for now, including avoiding closing the Strait of Hormuz, a critical chokepoint in global trade. Oil prices tumbled more after Iran struck US military base in Qatar, a sign of Iran’s economic retaliation. But the risk of further volatility remains high, mirroring the energy market disruptions seen in 2022 following Russia’s invasion of Ukraine. But analysts believe there is enough spare capacity to blunt the immediate impact of a supply shortage, though analysts say it is hard to see in the current environment how Iran would push more barrels into the market since a lot of their supply ends up going to China, says Peter McNally, global head of Sector Analysts and global sector lead at Third Bridge Capital. The final decision lies with the country’s Supreme National Security Council.
Oil prices hit a five-month high over the weekend after the United States struck Iran’s nuclear facilities. Tehran retaliated with an attack on the US Al Udeid Air Base in Qatar, keeping global energy markets on edge.
But oil prices dropped sharply on Tuesday after it appeared that Iran was holding off further attacks for now, including avoiding closing the Strait of Hormuz, a critical chokepoint in global trade.
Brent Crude, the international benchmark for oil prices, has tumbled more than 5.6 percent so far in the trading day and is currently trading at around $66 a barrel.
Strait of Hormuz closure still a concern
One of Iran’s most significant potential retaliatory economic measures would be to shut down the Strait of Hormuz.
The narrow waterway is a key transit route for 20 percent of the world’s oil supply, as well as a broader trade corridor between Europe and Asia.
While Iran’s parliament has backed a proposal to close the strait, the final decision lies with the country’s Supreme National Security Council.
Iran has made similar threats in the past, including in 2018 during US President Donald Trump’s first term, after the US withdrew from the Iran nuclear deal brokered under former President Barack Obama.
A closure could involve laying sea mines across the strait – which at its narrowest point is just 33 kilometres (21 miles) wide – and even attack or capture vessels. As recently as March, the Revolutionary Guard seized ships it accused of smuggling diesel. Similar tactics were used during the Iran-Iraq War in the 1980s.
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Shutting the Strait would send a jolt through global markets, though analysts believe there is enough spare capacity to blunt the immediate impact. Still, the risk of further volatility remains high, mirroring the energy market disruptions seen in 2022 following Russia’s invasion of Ukraine.
HSBC analysts say that crude oil prices could top $80 a barrel if the Strait is closed. Goldman Sachs forecasts that it could be $110.
But the strike on the US airbase in Qatar actually calmed global markets because it suggested that economic retaliation is not at the forefront of Tehran’s arsenal.
“If Iran were serious about retaliation, it would sink an oil tanker in the Straits of Hormuz. The fact that it isn’t doing that means it’s bending the knee,” Robin Brooks, senior fellow at the Brookings Institution, said in a post on the social media platform X.
Moment of flux
Outside of the conflict, the oil market was already in a moment of flux. In May, OPEC agreed to increase production by as much as 411,000 barrels per day for the month of July, part of a move to unwind voluntary output cuts after demand crashed during the COVID pandemic.
There are other ways to mitigate the impact of a supply shortage.
Spare production capacity from OPEC+, primarily in Saudi Arabia and the United Arab Emirates, could quickly add about 2.5 million barrels per day to the market, with as much as five million available over the longer term, according to analysis from Third Bridge Capital.
That could buy time if there is a hit on global oil supplies before it ultimately impacts consumers at the gas pump.
Iran produces 4 percent of the global oil supply, most of which goes to China due to existing global sanctions on Iranian oil.
“It’s hard to see in the current environment how Iran would push more barrels into the market since a lot of their supply ends up going to China,” Peter McNally, global head of Sector Analysts and global sector lead at Third Bridge Capital, told Al Jazeera.
China purchases nearly 90 percent of Iran’s oil exports, totalling about 1.6 million barrels per day. China is already grappling with US tariffs and any increase in energy prices will hurt its economy, says Abigail Hall Blanco, professor of economics at the University of Tampa.
“Oil markets are incredibly interconnected. And so if the price of oil globally shoots up as a result of a closure or a restriction of oil tankers passing through the strait, then certainly you would see those impacts on the US and other markets as well,” Hall Blanco told Al Jazeera.
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Earlier this morning, Trump said that China can continue to buy Iranian oil, signalling a shift in US policy as so far Trump had aimed to end Iran’s oil exports. he had also imposed Iran-related sanctions on several of China’s so-called independent “teapot” refineries and port terminal operators for purchases of Iranian oil, Reuters news agency reported.
Meanwhile, regional producers are preparing for any fallout. Iraq’s state-run Basra Oil Company has begun evacuating foreign staff, fearing Iranian retaliation against US forces stationed in the area.
Western firms are also taking precautions. BP, which partners with Iraq’s Basra operation in the massive Rumaila oil field – averaging 3.32 million barrels per day – has reduced its on-site personnel. However, the company says output will not be affected. As of 3pm in New York (19:00 GMT), BP’s stock is down by 1.4 percent.
Outside OPEC+, producers like Brazil, Canada, Guyana and the US could increase output to help fill any supply gap. But with the exception of the US and Canada, the other countries take longer to make those moves, experts said.
“The difference with everyone except the US is just its bit longer lead time. There’s less of an instantaneous response to higher prices. The growth is going to continue. If there is an outage, by way of Iran and the Strait of Hormuz, the quickest [way] to add production is either in Saudi Arabia, the UAE or the US,” McNally said. “But like longer term, the non-OPEC supply will continue to meet most of the demand growth going forward.”
Over the past decade, non-OPEC countries have significantly ramped up production, a trend that’s expected to continue. The Energy Information Administration (EIA) projected in December (PDF) that 90 percent of oil production growth this year will come from non-OPEC sources.
The US also has a strategic petroleum reserve at its disposal that currently holds 402.5 million barrels. The reserve is intended to be tapped into in moments of a dip in production due to global emergencies.
While the US does produce more oil than any other country in the world, at current levels, it will cost $20bn and several years to refill the strategic reserve.
A political risk for Trump
On Monday, Trump on Truth Social said in all-caps, “EVERYONE, KEEP OIL PRICES DOWN, I’M WATCHING.”
Trump campaigned on cutting prices for everyday goods. But his volatile trade policies and tariffs have pushed prices upward. In the most recent consumer price index report, a key metric the central bank uses to measure the rate of inflation, food prices are up 2.9 percent compared to this time last year.
But oil has remained a key strength for the Trump administration, with prices dropping, including a 12 percent decline in gas prices from this time last year.
But that could change very quickly as prices fluctuate.
“It’s just that it’s a fluid situation,” McNally said.
Oil prices are falling so much it’s now cheaper than it was before the Iran-Israel conflict
Oil prices fall sharply Tuesday, returning to levels last seen before the Iran-Israel conflict. Investors cheered news of a ceasefire, albeit fragile, between the two countries. The Dow closed higher by 507 points, or 1.19%. The S&P 500 gained 1.11%, while the tech-heavy Nasdaq Composite rose 1.43%. Wall Street’s fear gauge, the CBOE Volatility Index, was down 12%, signaling relative calm in markets.. The ceasefire makes it less likely that global oil supplies will be disrupted. Many investors have been worried that Iran could close the Strait of Hormuz, a critical waterway ferrying around a quarter of the world’s oil supply. That scenario — which would likely send oil prices skyward — now appears less of a threat.“There could be hiccups along the way, but the market is saying this (conflict) is likely over,” a commodities specialist said.
Oil prices fell sharply Tuesday, returning to levels last seen before the Iran-Israel conflict, as investors cheered news of a ceasefire, albeit fragile, between the two countries.
Brent crude, the global oil benchmark, fell 6.1% to $67.14 a barrel. West Texas Intermediate crude, the US oil benchmark, fell 6% to $64.37 a barrel.
These levels are broadly comparable to the closing prices in the days before Israel launched an unprecedented attack on Iranian nuclear facilities on June 13.
That assault triggered a 12-day conflict that has led both sides to fire a barrage of missiles into the other’s territory, as well as direct military involvement by Israel’s biggest ally, the United States.
President Donald Trump announced the ceasefire late Monday, though hours later Israel accused Iran of violating the terms. Iran denied the allegations. Trump on Tuesday morning flashed intense anger as the ceasefire seemed to grow fragile. The ceasefire appeared to hold as of Tuesday afternoon.
US stocks closed in the green. The Dow closed higher by 507 points, or 1.19%. The S&P 500 gained 1.11%, while the tech-heavy Nasdaq Composite rose 1.43%.
The S&P 500 was less than 1% away from an all-time high. The Nasdaq was 1.3% away from an all-time high.
Wall Street’s fear gauge, the CBOE Volatility Index, was down 12%, signaling relative calm in markets.
In Asia, stock indexes closed the day higher. Hong Kong’s Hang Seng finished up 2% and mainland China’s Shanghai Composite was 1.2% higher on the day.
Meanwhile, in Europe, the benchmark STOXX Europe 600 index, which includes UK-listed companies, closed higher by 1.11%.
“There could be hiccups along the way, but the market is saying this (conflict) is likely over,” Robert Yawger, commodities specialist at Mizuho Securities, told CNN Tuesday.
“Markets breathed a sigh of relief following Trump’s ceasefire declaration, but the celebration could be short-lived,” said Lukman Otunuga, senior market analyst at FXTM, in a note to investors. “If tensions flare again or the ceasefire is violated, we could see a swift return to risk aversion — boosting safe havens like gold and pressuring global equities.”
Relief over oil supplies
The ceasefire makes it less likely that global oil supplies will be disrupted. Many investors have been worried that Iran could close the Strait of Hormuz, a critical waterway ferrying around a quarter of the world’s oil supply, according to figures from the International Energy Agency.
That scenario — which would likely send oil prices skyward — now appears less of a threat.
Goldman Sachs has estimated that oil prices could blow past $100 a barrel if there is an “extended disruption” to the strait.
Assuming the ceasefire holds, Brent crude could hover “near the $70 per barrel level while clarity on a US-Iran deal emerges,” said Mukesh Sahdev, global head of commodity markets at Rystad Energy.
“The prospect of severe economic fallout from a potential blockade (of the strait) likely motivated both sides to agree to the ceasefire, if it is indeed genuine,” he wrote in a note.
While oil prices shot up after the Iran-Israel conflict began, touching a five-month high last week, they tanked Monday after Iran launched targeted and limited missile strikes on US bases in Qatar.
US crude tumbled 7.2% to settle at $68.51 a barrel, the biggest one-day drop since early April and one of its worst days over the past three years. Brent closed at $71.48 a barrel, down 7.2%, the steepest decline since August 2022.
India preps oil Plan B; Iran hits US bases in Qatar, Iraq
India has prepared a ‘Plan B’ for oil imports that includes leveraging existing sources of supplies to ensure energy security. The move comes amid fears of the conflict intensifying, with the US hinting at a regime change in Tehran. Economists expect the crisis to be short-lived and the impact on the economy temporary, but fear investor sentiment may suffer during the crisis. Iran is yet to act on its threat of closing the Strait of Hormuz, a development that could block a fifth of the world’s oil cargoes and send oil prices into a spiral. The Sensex tumbled over 900 points during the day, but recovered to close with a loss of 511.38 points or 0.62% at 81,896.79. The Nifty dropped 140.50 points or0.56% to 24,971.90. The August contract of Brent on the Intercontinental Exchange was trading at $77.88 per barrel, higher by 1.38% from its previous close.
While the Indian government has been working on its plan since Israel first struck Iran on 13 June, the attack on US bases threatens to draw the US deeper into the West Asia conflict. In the past, Iran has threatened US forces at Al Udeid Air Base, which hosts the forward headquarters of the US military’s Central Command.
India’s Plan B for crude oil will be activated to tide over any exigencies in the event of Iran closing the Strait of Hormuz. To be sure, this vital choke point has remained open even during the years-long Iran-Iraq war in the 1980s. The move comes amid fears of the conflict intensifying, with the US hinting at a regime change in Tehran. Economists expect the crisis to be short-lived and the impact on the economy temporary, but fear investor sentiment may suffer during the crisis.
‘India sources crude oil from about 39 countries. This bolsters our position of having multiple sources of oil supply even in the worst-case scenario of a closure of the Strait of Hormuz, which has never happened even during the Iran-Iraq war,” one of the two people cited above said on the condition of anonymity. “We have 75 days of crude oil reserve including the inventory, also comprising products held by oil marketing companies,” the person added.
Also read | Spot freight rates could surge further if Iran shuts Strait of Hormuz
Out of the 5.5 million barrels of crude oil that India consumes daily, about 1.5-2 million barrels transit the Strait of Hormuz.
At the time of writing the story, the August contract of Brent on the Intercontinental Exchange was trading at $77.88 per barrel, higher by 1.38% from its previous close. Similarly, the August contract of West Texas Intermediate on the NYMEX rose 1.23% to $74.75 per barrel.
Queries sent to the Union petroleum ministry remained unanswered.
War winds on The war in West Asia showed no signs of letting up on Monday, as bombs and missiles rained down in Israel and Iran. However, Iran is yet to act on its threat of closing the Strait of Hormuz, a development that could block a fifth of the world’s oil cargoes and send oil prices into a spiral.
Rahul Kalantri, vice president for commodities at Mehta Equities said: “Oil prices extended gains for a third straight week amid rising geopolitical tensions and a sharper-than-expected drawdown in US inventories. The ongoing hostilities between Israel and Iran have heightened supply concerns across West Asia, a region critical to global oil exports.”
On Monday, stock market investors took the West Asia pounding in their stride, with benchmarks recouping much of their intra-day losses. The Sensex tumbled over 900 points during the day, but recovered to close with a loss of 511.38 points or 0.62% at 81,896.79. The Nifty dropped 140.50 points or 0.56% to 24,971.90.
Experts and sector stakeholders said the market is watching how Iran responds to attacks on its nuclear facilities.
Strait disruption The disruption to trade over the Strait of Hormuz may be transitory as any prolonged uncertainty here can hurt Asian nations more than the West, said Rumki Majumdar, an economist at Deloitte India.
“If one considers the million barrels per day of crude oil and condensate transported through this straight, around 60% was traded to Asia, with China accounting for 30% alone in 2024. The exposure to US and EU is less than 10%,” said Majumdar.
“We believe the disruption will be temporary, leading to a temporary spike in global oil prices, and is expected to subside thereafter. The US will also increase its supply from its shore to meet the demand gap. India is probably cushioned enough to manage the temporary price spike through its reserves, so we believe that rising oil prices may not have an impact on India’s current account deficit as much,” added Majumdar.
“However, investor sentiment can be more sensitive to geopolitical tensions and in periods of uncertainty, capital tends to flow out of emerging markets. A depreciation in the domestic currency can in turn make energy imports costlier even if dollar price of oil stays rangebound. This can put pressure on current account deficit and retail price inflation,” said Majumdar.
Shipping Meanwhile, shipping rates have taken collateral damage from the unfolding conflict.
Anil Devli, chief executive of the Indian National Shipowners’ Association (INSA), said spot freight rates had increased by 150% since the start of the Israel-Iran war. “Experts and analysts note that a complete closure is unlikely due to the severe economic and strategic risks for Iran itself, though the threat has already heightened tensions and could lead to increased harassment of shipping in the area,” Devli added.
Also read | US attack on Iranian nuclear sites roils oil market, India braces for possible price surge
With Iran threatening to block the Strait, freight rates and premiums may increase further, increasing the landed cost of key supplies such as oil, industry executives and government officials said. If the Strait of Hormuz is closed, both oil prices and tanker and vessel rates on the route are expected to surge significantly. Shippers also fear the war cover provided to vessels operating in the region may be withdrawn if the Israel-Iran conflict escalates further.
Daily freight rates of tankers and vessels from West Asia to Japan and South Korea have increased to $50,000 (per vessel) from $20,000 about 10 days ago.
Front-loaded The Reserve Bank of India (RBI) has already frontloaded its rate cuts with a 50 basis points reduction in repo rate at the last monetary policy committee meeting. At the next monetary policy review in August, the central bank will have more information on monsoon showers, food prices and the West Asia situation, she explained. “Unless there is a full-blown war or heightened global tensions leading to spike in inflation, we expect the rates to remain steady,” Majumdar of Deloitte added.
UBS said in a research note on Monday that in its base case scenario, it does not expect the escalation in West Asia conflict will lead to a prolonged disruption to oil supplies in a way which could imperil global growth or cause significant challenges for central banks.
India’s ₹1.68 trillion fertilizer subsidy bill for FY26 also faces the prospect of swelling as natural gas price, which tends to follow crude oil price, and shipping cost tend to go up during periods of geopolitical tension.
Exports Around 100,000 tonnes of basmati rice destined for Iran are stranded at Indian ports due to the conflict, All India Rice Exporters Association said on Monday.
According to the Iranian state media, the Iranian parliament has already voted to block the Hormuz Strait in retaliation. However, the proposal needs the approval of the country’s Supreme National Security Council.
Iran currently produces about 3.3 million barrels per day (mbd) of crude oil, exporting 1.8-2.0 mbd. While Iranian oil facilities have reportedly been hit, the extent of damage remains unclear. However, the larger risk lies in a broader regional conflict that could pull in other major oil producers in the Gulf.
However, any move to block the strait may put significant cost pressures on India, even though it no longer buys oil directly from Iran due to US sanctions. Crude supplies from Iraq, Saudi Arabia, Kuwait, and the United Arab Emirates, all routed via the Strait of Hormuz, account for around 36% of India’s total imports. About 60% of its natural gas imports also cross this critical passage.
Diversification Union petroleum minister Hardeep Singh Puri on Sunday posted on X that India has diversified its supplies in the past few years, and a large volume of its supplies does not come through the Strait of Hormuz. On 13 June, as prices surged after Israel’s attacks on Iran, Puri held a review meeting and tweeted that India has adequate energy supplies for the coming months.
“Given the geopolitical tensions in the past few years, the Indian government and oil marketing companies have diversified their sources of oil across several countries. And OMCs usually have stocks of more than three months. Such initiatives may help minimize impact on product supplies in the near term,” said Gaurav Moda, partner and leader for energy at EY-Parthenon India.
An industry executive on condition of anonymity said that prices usually surge significantly in two phases—first, on anticipation of supply disruption and later when disruption is actually witnessed in physical supplies. “For now the surge post anticipation of disruption has by and large taken place and that has been factored in. Now if the strait is actually blocked and supplies get halted, that is when we may see a major rippling effect in prices,” the executive said.
OMC outlook Oil marketing companies (OMC), would also feel the pinch of high oil prices, while for the exploration and production companies it would bear a positive impact due to higher prices, experts said.
Noting that oil prices are up 21-25% since May-end, a report by Kotak Institutional Equities said that the strait of Hormuz is “too critical to be disrupted for long”.
“Short-term disruptions can lead to further price spikes. Unless the conflict worsens (and impacts the wider ME region), we do not see much impact on demand or supplies. Oil prices would likely trace back if the conflict ends soon. For India, higher oil/gas prices are negative. But for upstream PSUs, these are positive. For OMCs, while higher oil prices are negative, retail price cuts are now on the back-burner,” it said.
It said that when oil prices were declining and were around $60 per barrel, OMCs were witnessing high margins and there was an expectation of retail price cuts “With geopolitical worries rising, retail price cuts are unlikely soon. If retail prices were cut, a reversal would have been difficult. But if the conflict eases soon, margins may further rise. While OMCs’ near-term earnings will remain strong (despite the oil price spike), our key concerns remain on the lack of pricing power and large capex,” said the Kotak report.
Some of India’s exports to Iran are vital for the West Asian nation. India supplies affordable, life-saving medicines to Iran. Because of international restrictions, Iran struggles to get western medicines. This makes them highly dependent on India for common generic drugs, as well as special medicines for serious illnesses like cancer. India also sends raw materials for making drugs, a pharma company executive said, requesting anonymity.
India’s pharmaceutical exports to Iran crossed $28 million in FY25.
Oil prices: How the attacks on Iran could affect energy costs
How the attacks on Iran could affect oil prices and energy bills. The price of Brent crude, the global benchmark for oil, hit a five-month high of $81.40 at one point after the US bombed nuclear sites in Iran. News of a ceasefire has helped the price to fall back to about $69 a barrel. The oil price is closely-watched as it can far-reaching consequences for countries across the world, including the UK. Higher energy costs can make many goods more expensive, as seen following Russia’s invasion of Ukraine three years ago. About 20% of global oil and gas flows through this narrow shipping lane. On any given day, about a fifth of the world’s oil, worth $600bn, passes through it, from Gulf states such as Iraq, Kuwait, Saudi Arabia, the United Arab Emirates, Qatar and Iran itself. On Sunday night, Iran’s Press TV reported that the country’s parliament had approved a measure to close the channel, a move which would have profound consequences for global shipping and international trade if it happens.
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The recent conflict in the Middle East has led to sharp swings in the oil price. The price of Brent crude, the global benchmark for oil, hit a five-month high of $81.40 at one point after the US bombed nuclear sites in Iran. But news of a ceasefire has helped the price to fall back to about $69 a barrel. The oil price is closely-watched as it can far-reaching consequences for countries across the world, including the UK. Higher energy costs can make many goods more expensive, as seen following Russia’s invasion of Ukraine three years ago. The conflict had raised fears that Iran could decide to block traffic going through the Strait of Hormuz, one of the world’s most important oil shipping routes.
Why is the Strait of Hormuz so important?
The Strait of Hormuz is a channel between Iran and the northernmost tip of Oman, linking the Persian Gulf with the Arabian Sea. At its narrowest point it is just 33km (20 miles) across – about the same width as the English Channel. It is one of the world’s most important shipping routes. About 20% of global oil and gas flows through this narrow shipping lane. On any given day, about a fifth of the world’s oil and gas, worth $600bn, passes through it, from Gulf states such as Iraq, Kuwait, Saudi Arabia, the United Arab Emirates, Qatar and Iran itself. On Sunday night, Iran’s Press TV reported that the country’s parliament had approved a measure to close the channel, a move which would have profound consequences for global shipping and international trade if it happens.
Why haven’t oil prices reacted more?
Analysts at Goldman Sachs have suggested a worst-case scenario could lead to the supply of oil through the Strait of Hormuz halving for a month and dropping 10% for another 11 months. This would lead to the price of Brent crude peaking at $110 per barrel, they say. For now, though, traders are content that the risk of Iran actually closing the Strait of Hormuz is limited. “It would be difficult for Iran to fully close the Strait of Hormuz for an extended period due to the position of the US Navy’s Fifth Fleet in Bahrain,” wrote Helima Croft, head of global commodity strategy at RBC Capital Markets. “I think it’s pretty unlikely,” adds Simon French, chief economist at Panmure Liberum. That’s partly because Iran may come under pressure from its allies to keep the channel open. “China’s role in all this is pretty significant, because they can decide whether they want to provide financial support and military support to Iran, and they won’t do that if they think that a key provider of their oil is going to be disrupted,” says Mr French.
Will this affect energy bills and petrol prices?
Any conflict in the Middle East is bound to affect global energy prices, which has a knock-on effect on bills and petrol prices. In the aftermath of Trump’s so-called “Liberation Day” tariffs at the beginning of April, Brent crude prices dropped as low as $60. But the conflict in the Middle East has “unwound all the impact of tariffs on energy markets”, says Mr French, pushing prices back to where they were at the end of March. One of the biggest concerns for British households would be if the price of liquefied natural gas (LNG) rose. Although the UK procures most of its LNG from Norway, any blockade in the Strait of Hormuz would push up prices around the world. Craig Lowrey, principal consultant at Cornwall Insights, says household bills are safe from any volatility for now, because the energy regulator, Ofgem, has already announced the energy price cap for July until September. But if this conflict continues past September, household bills could rise. And businesses, which aren’t subject to the cap, could be hit more immediately. “That would certainly be a challenge,” he says. Consumers could see a more immediate effect in prices at petrol pumps . “There’s a lag of three or four weeks as the oil goes through the refining system,” says Mr French. If Brent does reach $100, “you’re staring down the barrel of 155p, 160p at the pump, which will be quite a shock”, he says. Prices at the pump have already begun to creep up. “The average price of a litre of petrol has increased by 1.5p to 133.5p in the last week while diesel has gone up by 2p to 140p,” says Simon Williams, head of policy at the RAC. However, he adds prices were a “long way off” those seen in spring 2022 when Russia had just invaded Ukraine.
What does this mean for global economies?
What Is the Strait of Hormuz and Why Is It So Important?
Iran controls the Northern side of the Strait of Hormuz, a passage which sees significant global trade pass through daily. If it so wished, Iran could block vessels from journeying through, or disrupt trade by seizing and attacking shipping containers and oil or gas tankers in the area. The Strait is narrow, stretching roughly 31 miles at its widest point. Most oil exports from Kuwait, Iraq, Saudi Arabia, Qatar, and the UAE pass through, as well as Iran’s own exports. Around 20% of global liquid natural gas exports also flow through the passage, mostly originating from Qatar. According to Deutsche Bank, the cost of a barrel of oil could surge to around $120 if the passage is blocked. The worst-case scenario could lead to “food shortages and social unrest,” says author and maritime news site gCaptain John Konrad, who says any disruption to production chains could have a “massive and social and economic impact” on the world. The U.S. is now an active participant in the ongoing Israel-Iran conflict.
Iran threatened to close the Strait of Hormuz, in what would serve as another act of retaliation, after the U.S. launched strikes on three key Iranian nuclear facilities over the weekend. While there was a brief reprieve in the tension after President Donald Trump announced a cease-fire between Israel and Iran on Monday, the conflict has erupted again, with both sides accusing each other of breaking the preliminary cease-fire terms. Now, concerns over the Strait of Hormuz are once again at an all-time high.
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Iran controls the Northern side of the Strait of Hormuz, a passage which sees significant global trade pass through daily. If it so wished, Iran could block vessels from journeying through, or disrupt trade by seizing and attacking shipping containers and oil or gas tankers in the area. With roughly 20 million barrels of oil passing through the Strait daily, making up about a fifth of global consumption, any interruption could be catastrophic. Here’s what to know about the Strait of Hormuz, its grave importance, and what stands to happen if the passage is disrupted amid the ongoing Israel-Iran conflict, of which the U.S. is now an active participant. What is the Strait of Hormuz? The Strait is narrow, stretching roughly 31 miles at its widest point. Iran is on its north bank opposite Oman and the United Arab Emirates (UAE). Most oil exports from Kuwait, Iraq, Saudi Arabia, Qatar, and the UAE pass through, as well as Iran’s own exports. Around 20% of global liquid natural gas exports also flow through the passage, mostly originating from Qatar.
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“Just verbal threats from Iran are causing concerns in the global market. So imagine how the impact will be if they really acted on their threats,” says Raydan. However, the maritime expert believes that a complete closure of the passage is unlikely as it would cause just as much harm to Iran themselves. “The Strait of Hormuz is very important to Iranian allies such as China, because most of Iran’s oil goes to China. Closing the Strait would also turn relations between Iran and the GCC [Gulf Cooperation Council] countries sour,” Raydan says, adding that Iranian relations with GCC countries such as Saudi Arabia and the UAE are currently stable and also not worth risking. “Iran can cause disruptions and keep the oil markets jittery by only carrying out individual maritime attacks,” Raydan argues, saying isolated assaults are far more likely than a closing of the entire passage. She warns, however, that should Iranian energy infrastructure be targeted in further attacks, the Iranian response could be more severe, but “for right now, we should [instead] consider the maritime arena… there’s a track history of Iran using that to retaliate.”
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Iran took part in the so-called Tanker War during the 1980s amid active conflict with Iraq, which saw oil tankers targeted by the Iranian military. The U.S. became involved and protected the tankers, in particular those flying U.S. flags, which it is bound to protect under maritime law.
Has Iran threatened to close the Strait of Hormuz before—and did it follow through on its threat? Iran previously threatened to block the strait in 2011, when Iran’s then-Vice President Mohammad Reza Rahimi declared that oil would not pass through the waters if Western sanctions against Iran were widened. The sanctions were issued as a result of concerns over Iran’s nuclear capabilities—the very topic at the forefront of the current conflict.
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In this instance, Iran did not follow through on its threat. As TIME noted in 2011: International maritime law guarantees unimpeded transit through straits, and any deliberate military disruption can be considered an act of war. What would be the impact on global trade if Iran closes the Strait of Hormuz? Oil exporters and importers would stand to be vastly impacted by a closure. And the economic ripple effect would surely be felt far and wide. According to Deutsche Bank, the cost of a barrel of oil could surge to around $120, should Iran block the passage or cause disruption to its shipping lanes. The cost of a barrel currently stands at around $75. John Konrad, author and founder of maritime news site gCaptain, says that barriers on new tanker constructions and any disruption to production chains could have a “massive” economic and social impact. “If you have a slowdown in natural gas, you could have a slowdown in fertilizer,” he says, adding that this could lead to “food shortages and unrest” in a worst-case scenario. The “ton mile cost” of shipping oil and natural gas will largely increase if Iran were to block trade through the Strait of Hormuz, Konrad argues, even if importers find alternative sources.
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“The main thing about disruptions and shipping is the ton mile. How many miles does it take to move a ton of oil, and what is that cost?” Kondrad notes. “The United States is a lot further away from Europe, and much further away from the massive energy consumption in China and Japan and Korea than the Middle East. So what makes the Middle East [so powerful] is not only the abundance of oil, but its central location between Europe and Asia.” European consumers would also feel the impact of any disruption in Hormuz, specifically North-West Europe, when it comes to the prices of gas, oil, and jet fuel. “U.S. refineries might intervene and substitute any gap, but still, disruptions would be felt. Prices will be higher,” Raydan says, adding that there would also be logistical issues, similar to those felt when Houthi strikes disrupted trade in the Red Sea following the start of the Israel-Hamas war.
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Read More: What Conflict in the Middle East Means for Climate Change How have lawmakers from the U.S., U.K., China, and beyond responded? U.S. Secretary of State Marco Rubio warned against action in the Strait of Hormuz from Iran in an interview with Fox News on Sunday. “I would encourage the Chinese government in Beijing to call him [Khamenei] about that because they [China] heavily depend on the Strait of Hormuz for oil,” Rubio said when asked if he expected Iran to close the Strait and disrupt global oil supplies. Rubio emphasized the U.S. viewpoint that any measures taken to disrupt supply chains in the Persian Gulf would be “another terrible mistake.” “It’s economic suicide it they do it and we retain options to deal with that. It would be a massive escalation that would merit a response,” he warned. China has also expressed deep concern over the escalating conflict, and the potential for disruption in trade.
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“The Persian Gulf and nearby waters are [an] important route for international trade in goods and energy. Keeping the region safe and stable serves the common interests of the international community,” said Guo Jiakun, the spokesperson for China’s Ministry of Foreign Affairs, during a press conference on Monday. “China calls on the international community to step up effort to promote de-escalation of the conflict, and prevent the regional turmoil from having a greater impact on global economic growth.” Jiakun went on to emphasize that “China stands ready to step up communication with Iran and other relevant parties to continue playing a constructive role for a de-escalation.” U.K Foreign Minister David Lammy also spoke out on Monday, expressing concerns over the news from the Iranian parliament. “It would be a mistake to blockade the Strait of Hormuz, I think he [Khamenei] gets that and understands that,” a hopeful Lammy told the BBC.
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In agreement, Kaja Kallas, the European Union representative for foreign affairs and security policy, told reporters on Monday: “The closing of the Strait of Hormuz is something that would be extremely dangerous and not good for anybody.”