Estimated reading time: 5 minutes

On Saturday, 21 June, the US bombed three nuclear facilities in Iran, raising tensions between the two global powers to their highest point in years; yesterday, Iran retaliated by striking an American air base in Qatar. This comes as Iran and Israel, the US’s longtime ally, have been engaged in an air war since 13 June, when Israel claimed Iran was in the process of producing a nuclear bomb.

The Iranian foreign minister has vowed ‘everlasting consequences’ for the attack, but as its military capabilities have been severely damaged, first by the Israeli and then the American attacks, there is a limited range of options available to retaliate. Were tensions to rise further, Iran could use indirect or non-military means to respond to further US or Israeli attacks. 

One of these ways could involve restricting or, in the worst case, totally closing the Strait of Hormuz, a key shipping channel linking Gulf countries to the Gulf of Oman and serving as a vital oil transit route. This could have a broad-ranging impact not just on oil prices but on global trade as a whole, raising costs and leading to higher risks.

The Strait of Hormuz

The Strait of Hormuz borders Iran in the north and the UAE and Oman in the South – the world’s 5th and 14th biggest oil exporters, respectively. About a fifth of the world’s oil and gas pass through the strait, which is only 33km wide at its narrowest point but deep enough for crude oil tankers to get through, making it one of the most used chokepoints in the global oil trade. 

Because of its strategic importance as a shipping channel for artillery and later oil, the strait has been a point of contention throughout history. During the 1990s, a struggle between Iran and the UAE for control of three islands in the strait ended with Iran having effective control of the channel. Iran has threatened to close it in 1988 after the US attacked Iran during the Iran-Iraq war, and again in 2008, when the US asserted it would view any closure of the channel as an act of war. 

Because the channel is so narrow, and the stretch used by tankers to transport oil is even narrower (just 3km wide in each direction), it wouldn’t be logistically very complicated for Iran to blockade it. However, even more restrained actions could have wide-ranging consequences. 

Disruption and blockades

The very fact of the strait’s viability as a shipping route being challenged is disrupting global trade. Oil futures rose by over 10% after the strikes were announced, and rising tensions could make nearby shipping routes – like the Red Sea, which has also been affected by the recent tensions in the Middle East – more dangerous than usual.

Two supertankers (ships capable of carrying 2 million barrels of crude oil, 10% of global trade volumes) turned back before reaching the Strait of Hormuz on Sunday, Bloomberg reports; they have since made the crossing. However, shipping companies, keenly aware of risks, have been considering avoiding the strait altogether: two Japanese shipping companies, Nippon Yusen and Mitsui O.S.K. Lines, recently said they had instructed vessels to minimise time spent in the Gulf and around the Strait. 

Iran may also employ indirect means to disrupt traffic in the strait. Yesterday, the Joint Maritime Information Center (JMIC) reported high levels of electronic interference in the Persian Gulf and around the channel specifically. The interference affects Global Navigation Satellite Systems (GNSS), which help ships navigate, especially in conditions of low visibility; the JMIC reports that ships are choosing to pass through the strait during daylight hours as a result. 

What does this mean for global trade?

Even minor disruptions or a perception of higher risk could have effects on global trade that last long after tensions decrease. Shipping companies rerouting their ships, delaying transit, or changing their normal patterns could lead to delays in the medium term and eat into already thin margins of shipping companies.

Rising risks may put a strain on trade insurance providers and raise costs in the coming months, even if the tension turns out to be short-lived. After Iran’s attacks on Qatar, which many are interpreting as retaliation for Saturday’s strike, oil prices fell back to nearly pre-strike levels. However, were tensions to rise again – for example, if the US attacks Iran again, or if the air war with Israel intensifies – oil prices could rise again, making shipping much more expensive and disrupting global trade further.

The vast majority of the oil shipped through the Strait is bound for Asia, with 28% going to China alone. Even a short-lived closure or disruption may put a large strain on the Asian economies, perhaps leading them, in turn, to enact more protectionist oil policies to preserve domestic supply. China, which has kept a relatively low profile in the recent Middle Eastern conflicts, has been asked by the US Secretary of State to intervene in this case and ask Iran to keep the Strait of Hormuz open. 

All this would lead to even higher tensions globally, and a more disrupted trade as even more shipping companies, including Chinese ones, may choose to avoid the Strait or the Gulf altogether. While little other than oil and gas pass through the Strait of Hormuz, hangovers from other shipping canal disruptions – tensions over the Panama Canal, recent pirate and Houthi attacks in the Red Sea – may still mean a diversion of ships causes delays and bottlenecks elsewhere.

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While on paper, a shutdown of the Strait looks almost inevitable – the Iranian parliament approved the closure on Sunday, the day following the US strike – the likelihood of it actually happening is minimal. Iran has by far the most to lose from a closure, both economically (it is the world’s 16th largest oil exporter, and unlike Oman and the UAE, it doesn’t have any alternate routes to ship its oil) and politically.

Were Iran to close down the strait, even briefly, global oil trade would be deeply affected, possibly leading other powerful Gulf states – who have thus far been neutral or backing Iran and Palestine in the conflict – to enter the conflict and protect their interests. The strikes on Iran and the recently announced ceasefire between Iran and Israel are other signs that tensions are dying down. However, the tensions – quick to fire up as much as to die down – once again show how central global trade is to geopolitical calculations, and how little-considered trade routes can quickly become risky points of contention.