Potential Closure of Strait of Hormuz Sparks Global Energy Concerns

The semi-official Tasnim news agency has reported that the Strait of Hormuz has been shut down following strikes on Iran in the early hours of February 28. Vessels in the vicinity have received radio warnings from Iran’s Revolutionary Guards, stating that no ships are allowed to pass through the strait. Additionally, an oil tanker was attacked near Oman’s port of Khasab, located within the strait, although the perpetrator of the attack remains unidentified.

The Strait of Hormuz is a critical maritime passage, with the US Energy Information Administration indicating that approximately 20 million barrels of oil and petroleum products transit through it daily, accounting for about one-fifth of global oil consumption. The strait is also vital for the global liquefied natural gas (LNG) market, facilitating around 20 percent of the world’s LNG trade.

Disruptions in the strait could immediately remove a significant portion of the world’s energy supply from global markets. Although radio messages declaring the strait closed are not legally binding under international law, markets and shipping companies often react preemptively to perceived risks. The United Kingdom Maritime Trade Operations has noted that transit through international straits remains protected unless physically obstructed, as per the United Nations Convention on the Law of the Sea.

Despite the lack of a formal blockade, vessel traffic in the strait has decreased by 40-50 percent within hours, as ships have hurried to exit the area and new arrivals have hesitated to enter. S&P Global Commodity Insights reported a slight decline in outbound oil and product flows in February compared to January, indicating that geopolitical tensions alone can slow shipments.

Analysts from S&P Global CERA have warned that the risk associated with the Strait of Hormuz extends beyond closure. If Iran escalates by seizing tankers or deploying drones to threaten commercial traffic, voyage times and costs for Middle East oil exports could increase. Several shipping companies have already begun avoiding the strait, anticipating delays and rescheduling shipments.

There is no alternative export system of comparable scale to the Strait of Hormuz. While Saudi Arabia and the UAE have bypass pipelines, these can only handle a fraction of Gulf flows. Iraq, Kuwait, and Qatar lack significant alternatives. A formal closure of the strait would cut off most Gulf oil exports from the world. Even with maximum use of alternative pipelines, analysts estimate that about two-thirds of Gulf exports would remain stranded.

The LNG market would also suffer, as Qatar, the largest exporter of LNG, relies heavily on the strait for its exports. A blockade could deprive Asian economies, such as Japan, South Korea, China, and India, of their key LNG suppliers within days, affecting their electricity generation.

Historically, a sudden loss of Gulf supply could lead to a sharp increase in oil prices, affecting global consumers through higher gas prices, more expensive airline tickets, and increased transport costs, which could raise the prices of food and goods. Financial markets typically react before physical shortages occur, with oil futures rising and transport-sector equities weakening.

Strategic petroleum reserves could help moderate the shock, but releases take time and cannot fully replace Gulf crude grades. Within the Gulf, halting exports would quickly strain government finances, as countries like Iraq, Kuwait, and Qatar rely heavily on oil revenues for public spending. Storage facilities could fill rapidly, forcing producers to cut output and lose income.

The effects on shipping would extend beyond oil, with tanker rerouting, insurance repricing, and naval risk zones potentially raising freight rates across bulk commodities and container shipping, impacting global logistics.