In response to the US and Israeli airstrikes – Iran has retaliated by declaring the Strait of Hormuz closed. Any maritime traffic that dares to travel through risks being set on fire by the Iranian military.
This comes in the wake of the widening war in the Middle East and the assassination of the Iran’s Supreme Leader Ali Khamenei.
Maritime insurance companies reacted quickly to the initial conflict, and announced they would withdraw all war risk cover for ships in the Persian Gulf from this Thursday: effectively implementing a policy of ‘enter at your own peril’. Global shippers have already suspended all services in the region, including the world’s biggest shipping company Maersk and similar carriers such as MSC, Hapag-Lloyd, and CMA-CGM.
Located between Iran and Oman, the Strait of Hormuz is only 55-kilometres wide and separates the Persian Gulf from the Arabian Sea. The narrow strait serves as a key passage for vessels ferrying oil and gas from the Middle East to China, Europe and the US – making it one of the most important pieces of global real estate in the world.
Alternative routes do exist, and one option would be the East-West Pipeline, a nearly 750-mile-long pipeline in Saudi Arabia that delivers oil to ports on the Red Sea. Shipments could also be diverted via the Abu Dhabi Crude Oil Pipeline, a 400-mile pipeline in the United Arab Emirates that transports oil to a facility on the Gulf of Oman. However, these alternate routes could only facilitate a fraction of the oil that would ordinarily pass through the Strait of Hormuz.
Reacting to the geopolitical uncertainty, Brent Crude, the international oil benchmark, rose 13% to reach $81.57 on Monday morning, its highest level in over a year. A rise in oil prices can increase inflation and can simultaneously reduce growth as it hampers the public’s ability and willingness to spend. Some analysts have predicted if the passage is closed indefinitely – oil could potentially cross $100 per barrel.
These risks therefore reduce the chances of further interest rate cuts in a blow for borrowers in the UK. According to financial markets, there is now just a one-in-three chance of a cut from 3.75 per cent to 3.5 per cent when the Bank of England’s monetary policy committee (MPC) announces its next decision on the 19th of March.
China, India, Japan and South Korea will undoubtedly be hit the hardest if the strait remains closed – as these countries account for 75% of the oil that passes through the region. Japan and South Korea are particularly susceptible to supply shocks, as they source 87% and 81% of their overall energy from fossil fuel imports.
Despite the far-reaching consequences to the global market, Iran is unlikely to succumb to global pressure, with Foreign Minister Abbas Araghchi warning that Tehran sees “no limit” to its right to self-defence. Analysts will instead hope the Iran is unable to maintain the closure, as a full shutdown would block its own oil from reaching international markets, damaging the country’s already fragile economy.
