Energy experts say that the Strait of Hormuz is the world’s most important shipping route for energy. It’s also the most dangerous.
At its narrowest point the Strait is only 3.2 kilometers wide – barely over two miles, but this exceptionally small area has incredible strategic importance.
“Five of the world’s Top 10 oil-producing countries – Saudi Arabia, Iran, Iraq, United Arab Emirates, and Kuwait – border the Persian Gulf, as does Qatar, the world’s largest liquefied natural gas (LNG) exporter,” writes Nick Giambruno in the International Man, a website that supports hard money and other ideas of investor Doug Casey.
“The Strait of Hormuz is their only sea route to world markets.” This explains why it’s so important for them that it remain open, and why it’s even more crucial for the rest of the world.
According to data provided by the U.S. Energy Information Administration, nearly 30% of the world’s oil exports passes through the Strait, about $1.5 billion worth of the black gold each day. In addition, around 33% of the world’s daily LNG exports also are shipped through this route.
The world relies on these oil and gas exports and if, for whatever the reason, they are not shipped, the global economy would instantly suffer a terrible jolt, inflation would soar, and interest rates skyrocket. In short, all the ingredients necessary for economic chaos. The world would be in really dire straits!
Lessons Recalled
The world got a taste of what that would be like on several occasions. The first was in October 1973, just after the Yom Kippur War broke out. Arab members of the Organization of Petroleum Exporting Countries (OPEC) imposed an embargo against the United States in retaliation for America’s resupplying the Israeli military. This also allowed them to gain leverage in the post-war peace negotiations, according to Wikipedia.
At that time, oil was just $2.90/barrel, the U.S. was producing most of the oil it needed, and the massive oil reserves that had been discovered in Alaska were scheduled to come on line soon afterward. Nevertheless, the embargo caused approximately 9% of the oil supply to be taken off the market, which created a shortfall. This may not sound like a desperate situation, but the markets saw it otherwise. Oil prices quadrupled and created much higher inflation and related economic problems.
A second energy shortage erupted in 1979. This one was caused by a very different problem: growing political unrest in Iran that impacted both their oil production and exports. In this crisis, 6% of the world’s oil supply was removed from the market, and it too created economic havoc. Oil prices nearly tripled and the economic problems that followed were very similar to those in 1973.
There was yet another oil shock in 1990, this one created by Iraq’s invasion of Kuwait, and it too created both political and economic problems. Approximately 7% of the world’s oil supply vanished from global markets and resulted in oil prices nearly doubling, higher inflation, and other challenges.
Heads Up!
Is the world on the brink of yet another oil crisis, this one because of the Strait of Hormuz being blocked? Hopefully not, because this scenario would have much worse ramifications than the previous ones. Although most governments and people desperately hope this can be avoided, it remains a very real possibility.
So what would happen if the Strait is blocked? This will give you an idea. If Iran (or any of its proxies) shuts the Strait, 21 million barrels of oil/day would immediately be removed from the world’s market – about 22% of its total supply! The percentage of global output lost would be three times or more the percentages lost in previous crises - and the problems those created were bad enough!
Blocking the Strait would create the worse oil supply shock the world has ever seen…by far! And it would occur at a time when inflation is already high, when tens of millions of Americans are already hurting from their financial woes, and when the deficit is so high that it may be very difficult for our government to provide meaningful assistance and relief.
According to Giambruno, “Thanks to its commanding geography and expertise in unconventional and asymmetric warfare, Iran can shut down the Strait and there’s not much anyone can do about it. It’s Iran’s geopolitical trump card.”
Send For The Marines
If the Strait is closed, the U.S. military would have to get involved to reopen it as quickly as possible, in part to restore economic stability as quickly as possible, but also because no one else has the military and technical expertise to do so.
How long might this take? There are too many uncertainties to estimate that now. Nor could anyone calculate the costs or the number of personnel and materiel that would be required. In addition, the collateral damage that could occur is also impossible to figure. Clearly the costs would be very high. Given the enormous economic and political repercussions that would occur, the toll could be painfully high and likely have far-reaching and long-lasting consequences.
Analysts predict it could take weeks to reopen the Strait, and no one knows for sure how this scenario would unfold. In 2002, the Millennium Challenge war games studied this hypothetical situation and concluded that a mission of this kind may simply not be winnable!
If a war with Iran does break out, Giambruno believes the price of oil would skyrocket by at least the percentage it did in 1973 – and it quadrupled then. That would drive oil to about $300/barrel!
“And that’s a conservative estimate because closing the Strait would cause a much larger supply shock than the 1973 oil embargo did,” he says. “The market doesn’t appreciate how close we are to a war with Iran and the implications of that.”
The idea of the Strait being blocked is not new; it’s even been the subject of many suspense novels and movies over the years. But now, when global tensions are so high and the bizarre is becoming reality, it is a much more frightening prospect. Let’s hope we never experience it firsthand.
Sources: federalreservehistory.org; history.state.gov; ideas.repec.org; internationalman.com; investopedia.com; marketplace.org; wikipedia.org; windows.net; zerohedge.com
Gerald Harris is a financial and feature writer. Gerald can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.
