The Strait of Hormuz is a vital route for oil. Closing it could backfire on Iran
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The Strait of Hormuz is a vital route for oil. Closing it could backfire on Iran
The Strait of Hormuz is the world’s most important oil chokepoint. It connects the Persian Gulf with the Gulf of Oman and the Arabian Sea. Iran has a fleet of fast-attack boats and thousands of naval mines. It could also fire missiles from its long Persian Gulf shore. If Iran blocked the strait, oil prices could shoot as high as $120-$130 per barrel, at least temporarily, an analyst says. The U.S. imported only about 7% of its oil from Persian Gulf countries through strait in 2024, the lowest level in nearly 40 years, according to the USEIA. The US Navy would likely intervene to keep the Strait open, and it would likely be reopened “very fast,’’ Kpler analyst Homayoun Falakshahi says. “A price spike “would’n’t last very long,” he adds, “at least at first.’ ’”
The U.S. military’s strike on three sites in Iran over the weekend has raised questions about how its military might respond.
The Strait of Hormuz is between Oman and Iran, which boasts a fleet of fast-attack boats and thousands of naval mines as well as missiles that it could use to make the strait impassable, at least for a time.
Iran’s main naval base at Bandar Abbas is on the north coast of the strait. It could also fire missiles from its long Persian Gulf shore, as its allies, Yemen’s Houthi rebels, have done in the Red Sea.
About 20 million barrels of oil per day, or around 20% of the world’s oil consumption, passed through the strait in 2024. Most of that oil goes to Asia.
Here is a look at the waterway and its impact on the global economy:
An energy highway in a volatile region
The strait connects the Persian Gulf with the Gulf of Oman and the Arabian Sea. It’s only 33 kilometers (21 miles) wide at its narrowest point, but deep enough and wide enough to handle the world’s largest crude oil tankers.
Oil that passes through the strait comes from Saudi Arabia, the United Arab Emirates, Iraq, Iran, Kuwait, and Bahrain, while major supplies of liquefied natural gas come from Qatar. At its narrowest point, the sea lanes for tankers lie in Omani waters, and before and after that cross into Iranian territory.
While some global oil chokepoints can be circumvented by taking longer routes that simply add costs, that’s not an option for most of the oil moving through the strait.
That’s because the pipelines that could be used to carry the oil on land, such as Saudi Arabia’s East-West pipeline, they don’t have nearly enough capacity. “Most volumes that transit the strait have no alternative means of exiting the region,” according to the U.S. Energy Information Administration.
Closing the Strait of Hormuz would send oil prices massively higher — at least at first
If Iran blocked the strait, oil prices could shoot as high as $120-$130 per barrel, at least temporarily, said Homayoun Falakshahi, head of crude oil analyst at Kpler, in an online webinar Sunday.
That would deal an inflationary shock to the global economy — if it lasted. Analysts think it wouldn’t.
Asia would be directly impacted because 84% of the oil moving through the strait is headed for Asia; top destinations are China, India, Japan and South Korea. China gets 47% of its seaborne oil from the Gulf. China, however, has an oil inventory of 1.1 billion barrels, or 2 1/2 months of supply.
U.S. oil customers would feel the impact of the higher prices but would not lose much supply. The U.S. imported only about 7% of its oil from Persian Gulf countries through the strait in 2024, according to the USEIA. That was the lowest level in nearly 40 years.
Iran has good reasons not to block the strait
Closing the strait would cut off Iran’s own oil exports. While Iran does have a new terminal under construction at Jask, just outside the strait, the new facility has loaded oil only once and isn’t in a position to replace the strait, according to Kpler analysts.
Closure would hit China, Iran’s largest trading partner and only remaining oil customer, and harm its oil-exporting Arab neighbors, who are at least officially supporting it in its war with Israel.
And it would mean blocking Oman’s territorial waters, offending a country that has served as a mediator between the U.S. and Iran.
The US would likely intervene to reopen the strait
Any price spike would probably not last. One big reason: Analysts expect that the U.S. Navy would intervene to keep the strait open. In the 1980s, U.S. warships escorted Kuwaiti oil tankers through the strait to protect them against Iranian attacks during the Iran-Iraq war.
A price spike “wouldn’t last very long” and the strait would likely be reopened “very fast,” said Kpler’s Falakshahi.
U.S. use of force to reopen the strait would likely be supported by Europe and “even unofficially by China,” he said. “Iran’s navy would probably get destroyed in a matter of hours or days.”
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Analysts forecast only slight bump in gasoline prices because of US attack
Oil prices on world markets for the benchmark West Texas Intermediate crude were trading just below $74 a barrel Monday. Oil analysts are cautiously optimistic energy supplies will remain steady, and price increases will rise only temporarily, providing the conflict does not spread. The biggest thing to watch is whether the Iranians levy any kind of assaults on U.S. assets, and then if the United States or Israel takes out a terminal known as Kharg Island, which is where all the exports of Iranian oil are moved out of. The national average on-highway diesel price rose 10 cents to $3.57 a gallon last week, according to the Energy Information Administration. The increase is based in part on high demand for the fuel and increased refining costs as ultralow sulfur diesel costs more to refine to comply with environmental regulations.
World oil markets have been up and down since Saturday night’s U.S. attack on Iran’s nuclear facilities.
At midday Monday, oil prices on world markets for the benchmark West Texas Intermediate crude were trading just below $74 a barrel, about $1 per barrel lower than what they were on Friday before the bombing took place.
But because of the uncertainty of supply disruptions and Iran’s strategic importance as an energy supplier, prices could increase.
However, oil analysts are cautiously optimistic energy supplies will remain steady, and price increases will rise only temporarily, providing the conflict does not spread.
Industry analyst Tom Kloza, the chief market analyst at the energy consulting company Turner Mason, believes the U.S. airstrikes alone are not likely to cause a huge spike in energy prices, provided Iran’s energy production is not disrupted.
“I’d be surprised if these increases we’re seeing turn into larger increases or they are sustained,” Kloza said, “Now, you know, things can happen. This is war, and there’s a lot of different things that one can’t predict.
He said the biggest thing to watch is whether the Iranians levy any kind of assaults on U.S. assets, and then if the United States or Israel takes out a terminal known as Kharg Island, which is where all the exports of Iranian oil are moved out of. “If Iran tries to shut down the Strait of Hormuz, I think probably you’d see a military action to knock out Kharg Island,” he said.
Oil analyst Phil Flynn with PRICE Futures Group said that while some Iranian officials may want to close the critical Strait of Hormuz, he doubts that will happen because Iran desperately needs oil revenue to keep its struggling economy going, which has been damaged by economic sanctions.
“Because their only form of revenue is oil and if they cut off the Strait of Hormuz, who is going to buy their oil?” Flynn said. “Militarily, I don’t think anybody believes they could actually pull that off.”
According to AAA, gasoline prices remain less expensive now than what they were a year ago. The average cost for a gallon of regular unleaded is $3.22 a gallon, compared with $3.44 a gallon a year ago. A week ago, a gallon of unleaded cost $3.14.
While gasoline prices have inched up only fractionally, there is another concern, and that is the price of diesel fuel, which is a key component of the trucking and airline industry.
“Diesel prices are going to be the ones that are going to be feeling it most. That means the truckers and the diesel buyers,” Flynn said.
According to the Energy Information Administration, diesel prices saw a significant week-over-week increase last week. The national average on-highway diesel price rose 10 cents to $3.57.
“Diesel has been roaring higher, and it really could impact the world, going forward,” Kloza said, explaining that the increase is based in part on high demand for the fuel, especially in transportation, agriculture and construction and increased refining costs as ultralow sulfur diesel costs more to refine to comply with environmental regulations.
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The Strait of Hormuz is a vital route for oil. Closing it could backfire on Iran (Video)
The war between Israel and Iran has raised concerns that Iran could try to close the Strait of Hormuz. The strait is between Oman and Iran.
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