Hacking [Global] Politics #32: How the strait of Hormuz dictates global oil prices

Oil prices have been extremely volatile this past week. On Sunday, Israeli strikes on Iranian energy infrastructure pushed crude close to $100 per barrel, compared to $60 per barrel before the escalation on Feb. 28.

Markets worried that Iran could retaliate by disrupting traffic in the Strait of Hormuz.

Then Trump spoke.

The U.S. president said the war would not last long and shipping lanes would remain open. This reassured the market, and prices dropped fast, falling by more than 11 percent — only to climb back up later during the week.

Why does a narrow waterway between Iran and Oman have such an immediate impact on the global economy and oil prices?

Let’s break it down.

1. Why is the Strait of Hormuz so important?

Although narrow, the Strait of Hormuz is one of the most strategic chokepoints in the global energy system. Its geolocation and depth make it a vital corridor for Gulf oil exports, which include:

• Saudi Arabia
• Iraq
• United Arab Emirates
• Kuwait
• Qatar
• Iran

Every day, around 20 million barrels of oil pass through the strait (at least 60 tankers).

This is huge. It actually represents roughly:

• 30 percent of the global oil trade by sea
• about 20 percent of the total world oil consumption

In simple terms: one out of every five barrels of oil used in the world travels through Hormuz.

The strait is also crucial for liquefied natural gas (LNG), which is used for electricity generation, heating, industrial energy and cooking gas.

About 20 percent of global LNG trade passes through it too, mostly from Qatar, one of the world’s largest gas exporters.

(The rest of the world’s oil is produced in North America, Russia, Africa, Latin America and other regions, and transported through other pipelines and shipping routes).

2. What happens if the strait of Hormuz is threatened or closed?

Even the threat of disruption can shake global markets, similar to what we’re seeing today.

Oil prices are driven by supply expectations. If traders think a major supply route could be blocked, they anticipate a shortage, and prices rise immediately.

Insurance costs for tankers also increase sharply during crises. Shipping companies may refuse to send vessels into a conflict zone, which further reduces supply.

The Strait of Hormuz has never been fully closed; it has been repeatedly threatened, but is considered “de facto” closed because no one dares to go through it.

Major disruptions happened during the Iran-Iraq war in the 1980s, known as the Tanker War. Later, in 2019, one year after Trump withdrew from Iran’s nuclear deal of 2015.

Today, the Islamic Revolutionary Guard Corps (IRGC) General Sardar Jabbari threatened to “burn any ship” that tries to cross. At least 16 oil tankers and other commercial ships have been attacked in the Gulf since the U.S.-Israeli war against Iran began nearly two weeks ago.

3. What are some of the measures taken to counter further potential disruptions of the strait?

1. Alternative pipelines

For most major oil producers in the Gulf, there are few alternative routes, although Saudi Arabia and the United Arab Emirates can divert part of their exports through pipelines that bypass the strait.

But none can fully replace it.

Saudi Arabia operates the East-West pipeline, which carries oil from the Gulf to the Red Sea. It can transport around 7 million barrels per day.

The United Arab Emirates also built a pipeline from its oil fields to the port of Fujairah, on the Gulf of Oman, bypassing the strait. The Habshan–Fujairah oil pipeline can move around 1.5 million barrels per day.

But these alternatives combined still cover only a fraction of the oil that normally passes through Hormuz. That means a prolonged disruption would still remove millions of barrels per day from global markets.

1. Strategic oil reserves

Countries have also built strategic petroleum reserves to cushion shocks. The countries of the International Energy Agency (IEA) said they would release 400 million barrels of oil onto global markets to offset supply losses caused by the effective closure of the Strait of Hormuz.

Major economies like the United States, China and European countries maintain emergency oil stocks that can be released during crises.

Yet, this does not mean there are no complications here.

Even if 400 million barrels are released from emergency reserves, they would enter the market at only 2 to 3 million barrels per day, far less than the roughly 20 million barrels that normally pass through the Strait of Hormuz every day.

Meaning that prices would likely continue rising, forcing countries that rely on Middle Eastern oil or LNG (which comes mainly from Qatar) to cut consumption and seek alternatives.

1. Force protection for tankers

In practice, that means naval escorts for ships crossing the Strait of Hormuz. But maintaining normal traffic would be difficult. Around 40 to 60 oil tankers pass through the strait every day, and escorting them all would require a large number of warships.

The United States has littoral combat ships, designed to be fast and agile in coastal waters. They could escort tankers. But keeping traffic moving at the same pace would require many more vessels, potentially several warships per tanker, making the operation extremely demanding.

Here as well, things are not simple.

In fact, the Houthi attacks (Iran’s allies) in the Red Sea back in 2023 proved that escorting ships is not very effective. This is because Iran banks on an "asymmetric warfare” against the U.S. and Israel.

What is this strategy? It consists of hit-and-run attacks, sabotage, suicide bombings and other unconventional tactics in a bid to deplete and outlast their enemy stockpiles as opposed to destroying them.

Which is why even a rumor of closure or attack can disrupt global markets within hours.