All about the Strait of Hormuz and what’s at stake if the world’s vital oil shipping route is disrupted by war
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Oil prices rose on Monday as the escalating war in Iran disrupted tanker traffic in the Strait of Hormuz, highlighting how important the world’s oil supply route is.
The Strait of Hormuz is the narrow mouth of the Persian Gulf through which a fifth of the world’s oil passes. Tankers crossing the strait, on the northern border with Iran, carry oil and gas from Saudi Arabia, Kuwait, Iraq, Qatar, Bahrain, the United Arab Emirates and Iran. Most of that oil goes to Asia.
Any disruption to traffic through the Strait of Hormuz severely disrupts oil trade.
“The level of what’s at stake cannot be overestimated,” said Hakan Kaya, senior portfolio manager at investment management firm Neuberger Berman. He said a slow decline lasting a week or two could be taken by oil companies.
But a full or near shutdown that lasts a month or more will push crude oil prices, trading around $70 US on Monday, “up to triple digits” and European natural gas prices “towards or above crisis levels seen in 2022.”
Here’s what you need to know about the strait and the escalating war with Iran.
CBC business reporter Peter Armstrong describes what’s happening in the critical shipping lanes in the Strait of Hormuz on Monday as tensions escalate following the US and Israeli attacks on Iran.
Waterway is the key to shipping
The Strait of Hormuz is a winding waterway, approximately 33 kilometers wide at its narrowest point. It connects the Persian Gulf and the Gulf of Oman. From there, ships can travel to the rest of the world.
While Iran and Oman have their own territorial waters in this crisis, it is considered an international waterway through which all ships can navigate.
The UAE, which is home to the high-rise city of Dubai, also sits close to the waterway.
The importance of trade has long been established
The Strait of Hormuz has historically been important for trade, with pottery, ivory, silk and textiles moving from China through the region.
Today, it is the route of supertankers that carry oil and gas from Saudi Arabia, Kuwait, Iraq, Qatar, Bahrain, UAE and Iran. Most of it goes to Asian markets, including Iran’s remaining oil customer, China.
Although there are pipelines in Saudi Arabia and the UAE that can avoid this area, the US Energy Information Administration says that “most of the volumes that pass through the road have no alternative routes out of the region.”
Threats to this route have driven up global energy prices in the past, including during the Israel-Iran war in June last year.
International couriers stop working
International kidnappers have issued warnings to stop operations in the area. Danish shipping company Maersk, the world’s largest shipping company, said on Sunday it was suspending all crossings in the Strait of Hormuz until further notice. Other ocean carriers including Hapag-Lloyd, CMA-CGM and MSC have made similar announcements.
“No one wants to travel on it, and no insurer is willing to stand behind any transportation that goes through there right now,” said Tom Goldsby, chair of transportation in the Department of Transportation at the University of Tennessee.
“Those ships that are stuck in the Gulf are not going anywhere… There are also a lot of ships that were heading to the Gulf to take their place, and they are either stopped or going somewhere else now.”
Data and statistics company Kplr estimates that there are 70 full oil tankers and 75 clean tankers, carrying refined oil products, in the Mideast Gulf, which appear to be waiting to pass through. That’s nearly double the normal rate, according to Kplr. Meanwhile, about 60 tankers are sitting just outside the Mideast Gulf, east of the Strait of Hormuz, on hold.
Recent closings
Iran temporarily closed parts of the strait in mid-February for what it said were military exercises. Oil prices jumped nearly six percent in the following days.
The decision was a rare, perhaps unprecedented closure of the strait.
In past periods of tension and conflict, Iran has sometimes harassed ships, even if they are small, and during the Iran-Iraq war in the 1980s, both sides attacked tankers and other ships, using sea mines to completely block traffic in areas.
