Iran’s threat to block the strait has already sent shock waves through trade and transport sectors, with broader consequences expected if the regime follows through.
The doomsday scenario feared by global markets and world leaders seems closer than ever. A day after the US inserted itself into the Israel-Iran war, there is concern that Iran will retaliate by disrupting oil and gas exports from the region, sparking a global energy crisis with far-reaching consequences.
Tehran may be contemplating blocking the Strait of Hormuz, a chokepoint between Iran and Oman through which approximately 20% of global oil and gas demand flows. Iran has threatened the move in the past but never followed through.
According to Iranian state-run Press TV, Maj. Gen. Esmaeil Kowsari, a member of the parliament’s committee on national security and foreign policy, said lawmakers have reached a consensus on the closure of the strait, though the final decision rests with Iran’s Supreme National Security Council.
Gali Ingber, head of finance studies at Israel’s College of Management Academic Studies, believes there is a low probability the Islamic Republic will choose this course of action, although she said the probability likely increased after the American attack on three nuclear sites in Iran.
“The US currently has a substantial military presence in the Middle East, making it very difficult for Iran to execute such a move,” Ingber told The Media Line. “Such a move will elicit an even greater response from the US, which has the capabilities to thwart such an attempt.”
US President Donald Trump, who was elected after promising Americans to lower prices and improve the economy, will not want to see such a scenario materializing.
Iran is also dependent on transport through the strait for its own oil exports, making the closing the strait a double-edged sword. However, with few cards left to play, Tehran might decide such a move would be worth it.
If it chooses to close the strait, Iran will probably plant mines or use its military to strike vessels attempting to cross it. The US would likely respond harshly to such a move, making it a major risk for Iran.
Such a move would be suicidal for Iran, as much of its economy is based on oil and natural gas exports.
“Such a move would be suicidal for Iran, as much of its economy is based on oil and natural gas exports,” Eran Tal, founder and CEO of Volta Solar, an Israeli company specializing in high-efficiency photovoltaic systems and energy storage solutions, told The Media Line. “But such a move is not always a rational one.”
According to Tal, Iran may not completely shut down the strait but will opt for disrupting the traffic there.
“It is not a zero-sum game,” he said. “They can increase their presence there with navy ships, spread mines or shoot at vessels. This will result in a reduction of traffic there and a rise in prices of transportation, without completely shutting down the strait.”
Iran is one of the largest crude oil producers in the world, ranked third in OPEC.
Due to sanctions, Iran’s main importers are China and Russia. China is the world’s largest exporter and a critical part in international supply chains. Its vast manufacturing capacity and growing consumer market have a huge influence on trade, investments and economic growth worldwide. A hiccup in supply to China would translate into a global domino effect.
When a country can take a strait hostage, this is a strategic threat.
“When a country can take a strait hostage, this is a strategic threat,” said Tal.
Other oil producers, such as Saudi Arabia, Kuwait, and the United Arab Emirates, also export through Hormuz.
“Any disruption to global oil supply will create a major shortage,” Ingber said. “Such a shortage immediately translates into price hikes.”
If oil prices rise to above $100 a barrel, she said, “energy prices rise, and then electricity prices and in the end, food, fertilizers, metals—all of these rise, gradually leading to global inflation. In the end, this results in a recession and a rise in interest rates.”
Hours after the American strikes on Iranian nuclear sites, oil prices jumped on Monday to their highest level since January of this year. Should the current crisis continue, prices could rise further, and the ripple effects could affect many other aspects of the global market, not limited only to energy. Investors are troubled by the idea of violent exchanges in Hormuz and of global trade paralysis.
“Global trade and energy prices are already starting to rise just because of the risk of such an event,” Tal said. “We are seeing a major hike in transport and shipping prices to over double, just based on the risk premium.”
Global trade and energy prices are already starting to rise just because of the risk of such an event. We are seeing a major hike in transport and shipping prices to over double, just based on the risk premium.
Ingber explained that investors are buying now out of fears of future price hikes, which in itself causes prices to rise.
According to Tal, the closing of Hormuz will cause not only an immediate spike in energy prices, but also raise transportation and manufacturing prices, causing price hikes that will be felt globally.
An energy crisis stemming from tensions in Hormuz could lead many countries to reexamine their dependence on oil and gas. Facing the threat of supply disruptions and price hikes, governments and the private sector could lead to an increase in investments in renewable energy sources. Such a crisis could accelerate a global transition toward cleaner, more stable energy solutions, Ingber and Tal said.
“If we will see a decrease in the supply of fossil fuels and a rise in prices, this will be a driver toward renewable energy,” Tal said. “The fact that gas and oil prices are subject to fluctuations, sometimes because of geopolitical reasons, makes renewable energy more attractive.”
On Sunday, US Secretary of State Marco Rubio called on China to use its influence on Iran to not shut down the Strait of Hormuz.
“If they do that, it will be another terrible mistake. It’s economic suicide for them if they do it. And we retain options to deal with that, but other countries should be looking at that as well. It would hurt other countries’ economies a lot worse than ours,” Rubio said during an appearance on Fox News.
The Israeli military continued to attack Iran on Monday, with the Iranian leadership continuing to threaten reprisal.
Written by Keren Setton of The Media Line
