The Strait of Hormuz takes center stage yet again as geopolitical tensions in the Middle East resurface. The escalating Iran-Israel conflict has drawn renewed attention to this narrow but vital maritime corridor, which is located between the Persian Gulf to the Gulf of Oman.
Often described as the world’s most critical oil chokepoint, the strait is a strategic lifeline through which roughly 30 percent of global oil trade flows daily. With Iran repeatedly threatening to block the passage in response to military pressure, the global energy market is once again bracing for a potential supply disruption and a surge in energy prices.
Why is the Strait of Hormuz so important—and what impact would its closure have on energy markets?
What is the Strait of Hormuz?
The Strait of Hormuz is a narrow channel, approximately 48.2 kilometers wide at the narrowest point, between the Omani Musandam Peninsula and Iran. It connects the Persian Gulf to the Gulf of Oman. According to the Robert Strauss Center for International Security and Law, the strait is deep and relatively free of maritime hazards. Its depth is greatest near the Musandam Peninsula and tapers as it moves north toward the Iranian shore.
Commercial traffic through the Strait of Hormuz flows through the designated Traffic Separation Scheme (TSS) north of the Musandam Peninsula, but the water is also deep enough for large ships to travel through an Inshore Traffic Zone south of the Omani island of Didimar. Depths in this area reach over 650 feet, but the Omani government restricts access to this area to smaller vessels in normal, peacetime situations. Prior to 1979, the Inshore Traffic Zone served as the main shipping channel through the strait.
The strait contains eight major islands, seven of which are controlled by Iran. The nation’s control of these islands strengthens Iranian influence in the waters of the strait.
Why is it important for energy trade?
According to the International Energy Agency (EIA), around 20 million barrels a day transit the Strait of Hormuz, with 70 percent destined for Asia. With nearly 30 percent of the world’s seaborne oil trade moving through the passage and limited options to bypass it, any disruption to flows through the strait would have significant consequences for world oil markets.
Only 4.2 million barrels a day of pipeline capacity is available to redirect crude flows to avoid the Strait of Hormuz. Therefore, lasting disruptions to the passage, even if short-lived, would have a significant impact on oil markets.
Oil is not the only commodity that passes through the route. A closure of the maritime route would also have significant implications for global gas trade, shutting LNG exports from Qatar and the UAE, which together represent 20 percent of global LNG exports, with no alternative routes to export markets.
The Strait of Hormuz is the primary export route for oil pumped by Saudi Arabia, the UAE, Kuwait, Qatar, Iraq and Iran. Apart from physically disrupting oil shipments from these countries, any prolonged crisis in the route could also render unavailable the vast majority of the world’s spare production capacity, most of which is held by Saudi Arabia.
The bulk of the oil leaving the strait heads to Asian countries, with China, India and Japan importing the most. In the event of a disruption, 6.5 million barrels a day of crude oil could be exported from the Gulf via alternative routes, including Saudi Arabia’s pipeline to the Red Sea and the UAE’s pipeline to the Port of Fujairah.
Closure to send oil prices above $100
Unlike Saudi Arabia, the UAE and Iraq, which all have export routes that do not pass the strait, Iran relies exclusively on its Gulf terminals to export to markets outside the Caspian region. Nearly all its oil is being shipped to China, in defiance of U.S. sanctions.
Since Russia’s invasion of Ukraine, buyers in Europe have accounted for a growing share of crude exports from the region to offset those banned from Russia. Around 900 thousand barrels per day, or just over 5 percent of the region’s crude flows, are now being routed into Europe compared with 700 thousand barrels per day before Russia’s invasion of Ukraine in early 2022
While Iran has previously threatened to close the Strait of Hormuz in response to geopolitical tensions, it has yet to act on such threats. However, the prospect of a broader regional conflict following Israel’s airstrikes on Iran has renewed concerns over possible supply disruptions and rising energy prices.
The U.K. Maritime Trade Organization said last week that the rising tensions in the region could escalate the military activity in critical waterways and affect maritime transport, while the Baltic and International Maritime Council also warned that any attack could directly impact maritime transport.
Some analysts say that Iran has a lot at stake should it close the route, as almost all the country’s oil exports and a large portion of China’s oil imports come through the Strait of Hormuz.
Arne Lohmann Rasmussen, chief analyst and head of research at Global Risk Management, said that the closure of the Strait of Hormuz would be an “absolute nightmare” for the oil market. He added, “If Iran blocks this narrow chokepoint, it could affect up to 20 percent of global oil flows. A closure would likely send oil prices above $100.”
“It will have enormous consequences for the global oil and LNG markets, and Iran’s neighbors, such as Saudi Arabia, Qatar, Kuwait and the UAE, will be strongly affected. Closing the Strait of Hormuz for an extended period would not just disrupt the global oil and LNG markets, but it could potentially plunge the global economy into a severe recession,” Rasmussen added.
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What are the alternative export routes?
Alternative routes to ensure exports keep flowing are limited. Only Saudi Arabia, the UAE and Iraq have functional pipelines to move oil to terminals outside of the Gulf. It is estimated that available pipeline capacity amounts to 4.2 million barrels per day to help reroute crude oil that would otherwise have transited the Strait of Hormuz. This is one quarter of the average daily volume shipped via the route in 2023.
In the UAE, the Abu Dhabi Crude Oil Pipeline (ADCOP) runs 400 km from onshore oil facilities at Habshan to Fujairah. The nameplate capacity of the line is 1.5 million barrels per day. An estimated 600 thousand barrels per day are being exported via this route, leaving room for 900 thousand barrels per day to be rerouted in the case of a Strait of Hormuz closure.
In Saudi Arabia, the Abqaiq-Yanbu pipeline system crosses the Kingdom, connecting Abqaiq to Yanbu on the Red Sea. The system is composed of two lines with a total design capacity of 5 million barrels per day of crude oil. It’s estimated that 1.7 million barrels per day of the line’s capacity is used, leaving about 3.3 million barrels per day of spare capacity.
There is also a natural gas liquids pipeline running parallel to the Petroline, the Abqaiq-Yanbu NGL pipeline, with a capacity of 300 thousand barrels per day, which is fully utilized.
The sheer volume of oil that is exported via the Strait of Hormuz and the limited options to bypass it mean that any disruption to flows would have huge consequences for world oil markets. A significant spike in oil prices would be inevitable, and physical shortages would quickly develop if the disruption were to be prolonged.
