The Strait of Hormuz closure threatens disrupting global trade

The US-Israel/Iran war and the closure of the Strait of Hormuz – this channel lies between Oman and Iran some 21 nautical miles across, used by ships carrying roughly 15 million barrels of oil a day, besides large volumes of refined products and liquefied natural gas (LNG) – are causing major supply chain disruptions, creating economic problems among oil and LNG-importing countries.

Disruptions, delays, fuel surcharges, increased insurance costs, and trapped vessels at the Hormuz Strait are creating the perfect storm for global supply chains, especially for oil, fertilizer, LNG, metals, and a variety of containerized goods.

Iran which has a stranglehold over the Strait of Hormuz, has threatened to strike ships passing through it, though it has allowed a few ships of so-called “friendly nations” to pass unharmed. Hormuz is the shipping lane through which some 20% of the global oil and liquefied natural gas (LNG) passes; these commodities are vital for the energy-hungry South and East Asian economies. Hormuz is far more complex and difficult to navigate than the 2023 Red Sea blockade by the Houthis, given Iran’s greater military power and resolve than that of the Houthi rebels to fight back.

Kuwait Petroleum’s chief executive Sheikh Nawaf Saud Al-Sabah, in a recent message to the CERAWeek Energy Conference in Houston, Texas, emphasized that the Hormuz Strait is the “world’s strait, under international law and practical reality”.

Manhattan Institute Discusses Fallout from Hormuz Closure

US think tanks and energy-dedicated organizations have been holding events to discuss the Hormuz crisis. The Manhattan Institute, a New York City based think tank, together with the New York Foreign Press Center, recently organized a press event to discuss US leadership in oil, gas, coal, and nuclear energy production, with relevance for the global energy markets.

Two scholars, Mark P. Mills, the executive director of National Center for Energy Analytics, and Ken Girardin, a fellow at the Manhattan Institute, held discussions with journalists; Mills is a physicist and longtime energy analyst.

The Hormuz standoff, with Iran threatening to blow up any ships passing through the waterway, has led experts to think of alternative oil-transportation mode, since oil-transporting vessels through the Hormuz Strait can become bargaining chips or even destroyed by hostile powers.

In an interview, Mills told this correspondent that the alternative would be to build pipelines which could mitigate the effects of war on shipping. His panacea: “Pipelines can be built, with today’s highly advanced technology, in just few months rather than years as was the case in the past.”

“Besides, pipelines cannot be easily detected or blown up because they are generally buried underground,” Mills added.

The Gulf states, with their oil-dependent economies, are now showing interest in building and expanding pipelines to circumvent shipping on the waterway. Saudi Arabia already carries out uninterrupted oil shipments because of the East-West pipeline connected with Yanbu port in the Red Sea. With the present geopolitical tensions, this East-West pipeline today appears to be a good strategic calculation. Indeed, Mills saw a growing propensity among oil-producing nations to use pipelines rather than face the perils of sea transportation.

While admitting that no system is invulnerable, Mills argued that pipelines are much harder to disable than ships; besides, building or replacing tanker fleets takes far longer.

Will rising oil prices become uncontrollable and lead to a recession? “If the oil price rises to the level of $175 a barrel, we could have major problems in the global economy and the poorer countries would be the hardest hit,” he said, adding that recession would depend on the duration of the crisis. “The longer the duration the greater is the recession risk.”

Mills also clarified that talk of “delinking” oil was an exceedingly difficult undertaking. “Absolute consumption is high and every product is linked to oil. Indeed, 97% of transportation is oil-linked. Oil dependence is a strong factor in any calculation.”

But the “away-from-oil” propensity of the past was gaining ground among consumers, a trend reflected, for instance, in the rising electric vehicle demand, which today accounts for 3.5% of all transportation vehicles used in the country. Although demand for EVs is growing, Mills believed that EVs would still not make a substantial difference in global oil consumption demand, which, in his calculations, would decline by only 8 to 10%, far too short of the goal of completely renouncing oil.

For Mills, time is a crucial factor: emergency stock releases combined with a return to coal and fuel rationing could buy two or three months before the world faced outright physical shortages when prices would no longer be the deciding factor because oil was simply not available.

The Gulf oil-producing countries could also be driven to change their routes if large oil-consuming nations such as India, China, etc. began to view the Gulf oil as being hostage to the regional conflict; these buyers would be willing to pay more – an additional $10 to $15 a barrel - for supplies from other sources such as Brazil and Guyana, West Africa or even Canada, which would be less vulnerable to the Middle East tensions.

The Hormuz Quagmire

Ships passing through the Hormuz Strait are said to face risks five times greater than the Red Sea, where the Houthis, despite the allies' shooting down hundreds of drones and missiles, could sink four ships between 2024 and 2025. Indeed, many still use the much longer route around the Horn of Africa rather than the Red Sea route through which some 12% of global trade passes.

Military engagement in the Hormuz Strait would require several large warships, such as destroyers, backed by air power, using jets, drones, helicopters, etc. Analysts explain that a destroyer can intercept missiles but cannot simultaneously sweep mines, counter drone attacks from various directions, besides managing the GPS disruption. Analysts also believe that Iran has missiles and drone stockpiles hidden in buildings and other locations along the mountainous coastline.

Some see a ray of hope in the “safe shipping corridor” which Iran has established for approved transiting ships. India, Iraq, Malaysia, China, and Pakistan are in contact with Iran to allow their ships to pass through Hormuz. According to Lloyd's List, at least nine ships had used the corridor, as of the end of March, closely passing Iran’s Larak Island for checks by Iran’s navy and port authorities. Iran is reportedly planning to enforce a formalized approval process for foreign ships, requiring extensive information about the vessel’s origin and ownership, cargo destination, etc. It is not clear if the “approved” ships made any payment, but in one case, the owners of a vessel reportedly paid $2 million for safe passage.

Hormuz's impact on Asian economies

Besides the massive impact on the Gulf economies, countries in South and East Asia also face major disruptions. According to Boston Consulting Group, South Asian countries face disruptions of up to 10% or more in their total imports, while disruptions in China, Japan, South Korea, and others could rise to 5%-10% of their total imports. These Asian countries are now trying out different supply routes.