The Strait of Hormuz is the most important tanker transport route for global crude oil exports. Iran’s atomic program may trigger further sanctions and even military action from either Israel or the US. The Iranians won’t try to close the Strait of Hormuz as retaliation for EU sanctions because this would hurt Iran´s economy.
The importance of the Strait of Hormuz for global oil trade
Oil production from the Gulf countries equals roughly 29 percent of global crude oil production. Just to get a feeling for the market: When Libya´s oil production declined, which was just two percent of global production, the price of Brent increased by $20.
The pundits expect oil prices beyond $150 (some even suggest $200) if the Strait of Hormuz is closed. This is of course a serious issue for all oil speculators as what happens there can have an enormous impact; and certainly, the political situation has further deteriorated. A confrontation seems to be more likely now than a few years ago.
Iran’s atomic program and western sanctions – tensions are mounting
It is difficult to assess what is really happening on the ground inside Iran when it comes to its atomic program, which the country claims is entirely peaceful. I spent some time deciphering Iraq´s atomic weapons program as part of my bachelor’s diploma about weapons of mass destruction in the Arab countries.
The IAEA discovered schemes that only make sense as part of a nuclear military program. This “smoking gun” just raised the stakes: The Israelis advocate openly for military action. To make things worse, an internal Iranian power struggle was behind the organized storming of the British embassy in Teheran. The EU imposed sanctions on Iran´s oil exports.
The Iranians know the military threat very well. To avoid military action and more sanctions, they threatened to close the Strait of Hormuz if Iranian sites are targeted.
So are we heading towards an oil apocalypse as the Iranians punish the world with the closure of the Strait of Hormuz?
I don’t think so. The Iranians will act more logically than many would expect.
The Iranians won’t commit economic suicide – crude oil will continue to flow through the Strait of Hormuz
The first time I stumbled upon the Strait of Hormuz was back in 1987. The Iranians threatened to close it in order to punish the Arab Gulf states for their support of Iraq during the Iran-Iraq war. The US decided to guarantee the safe passage for ships from Kuwait and other crude oil suppliers, threatening the Iranians with direct war action. The Iranians never really challenged the US.
After the devastating bomb attack on US forces in Dahran, allegedly organized by Iranians, the US once again considered attacking Iran. As the story goes, the Saudis brokered a deal, the Iranians pledged not to repeat this kind of action. War was once again avoided. Again the military pundits thought about how a confrontation would be played out between the US and Iran.
Today, we seem to be back to square one. The Iranians tell us they could close the Strait of Hormuz while the US military just pledged to keep it open.
In my opinion, the Iranians just can´t do it. It would be a kind of economic suicide. Iran needs an open Strait of Hormuz in order to survive. Furthermore, such an action would alienate Iran´s allies Iraq and China.
Iran needs the oil money as much as the other Gulf countries. The way to get the crude to the customer is through the Strait of Hormuz.
The following map shows that all the Iranian oil terminals are located west of the Strait of Hormuz:
If they close the Strait of Hormuz by military force, their crude oil exports will abruptly stop. The country just can’t afford that.
Iran also has some influence in neighboring Iraq, where Shia Muslims rule. These connections date back to the time when Saddam Hussein ruled Iraq and the Iraqi Shia Muslim opposition was located in Teheran. Religion does matter a lot in the Middle East, but Iraqis will not volunteer to pay the bill for Iran’s nuclear ambitions. The petrodollars will be the watershed in this relationship. Losing its influence in Iraq will only isolate Iran further.
Another important player is China. China simply doesn´t want to pay $150 or even $200 per barrel. So it is in China’s interest to keep the Strait of Hormuz open. China is an important customer of Iranian crude oil. That gives them some kind of bargaining power. Furthermore, China can veto any UN initiative. The Iranians should think about this before acting.
In my opinion, the Iranian rhetoric is not going to lead to real action on the ground. The talk about closing the Strait of Hormuz is a bluff. Sending Iranian warships into the Indian Ocean tells us that any attempt to close it won’t happen tomorrow, Iranian ships would be easy targets for the far superior US navy.
My advice: Watch the news and stay calm.
The EU embargo is more real and may matter more than any vision of an all-out war and a closure of the Strait of Hormuz. The US strategy seems to favor more sanctions, which may eventually lead to some kind of Arab spring in Teheran, possibly wiping out the current regime.
I wouldn’t bet the ranch on military action in the Strait of Hormuz. We should instead focus on the fundamental factors of supply and demand. The pundits may talk up the price from time to time, but these price spikes, usually called a risk premium, will be short-lived.