Why closing the Strait of Hormuz would be an atomic bomb for the oil market

“Historic” is an adjective that has been worn out by use and abuse. There are, however, moments when it fits like a glove. This is one of them: Iran’s unilateral closure of the Strait of Hormuz following the U.S. offensive on its nuclear facilities would be the equivalent of dropping an atomic bomb on the oil market. We would, in short, enter uncharted territory: never has a commercial artery of this magnitude, through which a quarter of the world’s crude oil passes, and essential for the normal functioning of the largest commodities market on the planet, been closed.

Hormuz has played an essential role in the normal distribution of crude oil throughout the world for decades: virtually all of the Middle East’s oil production passes through it. If it were shut down by the country that controls it, Iran, most of the region’s fossil fuel powers (the United Arab Emirates, Qatar, Bahrain, and Kuwait) would be unable to export.

And the world’s largest oil exporter, Saudi Arabia, would see its export channels cut in half: of the 10 million barrels it extracts daily, it would only be able to put five on the market—the maximum capacity of the East-West pipeline, built in the early 1980s, during the endless war between Iran and Iraq.

It is true that the oil market is not at a particularly tense moment: rather than a shortage of crude oil, there is a surplus. This is due both to the new production that has entered the market in the last decade and to the dynamics of demand itself, in which the electrification of transportation in the West and Asia is becoming increasingly noticeable. It is also true that part of the oil blocked in the Persian Gulf could be replaced by exports from Latin American countries such as Brazil, Guyana or Argentina, or even by the U.S. itself. But it would take time: it is not as simple as pushing a button and pumping some more.

Tehran’s threat of closure is far from new: in recent decades, the Islamic Republic has repeatedly threatened to seal off this stretch of water, barely 21 miles (34 km) wide at its narrowest point, where oil and gas tankers are in constant transit. But the world had never been this close.

The closest thing was seven summers ago, in July 2018: back then, the Iranian regime threatened to block the strait if the United States didn’t lift the ban on its oil exports. At that time, the fear was that crude oil would soar above $200 a barrel, an unprecedented level. Today, the leading analysts in the sector agree that the $100 barrier would be easily surpassed. At that point, the damage to the global economy would be more than evident.

The gas industry is also on edge, and it’s no wonder: just over 20% of LNG tankers in transit around the world cross the Strait of Hormuz. Its closure would be the biggest shock since Russia’s invasion of Ukraine in 2022. It would also affect, and not a little, other raw materials, agricultural fertilizers and oil derivatives such as refined diesel. Conversely, Hormuz is the most direct — and in some cases the only — gateway for cereals, sugar and other foodstuffs into many Gulf countries.

Until this Sunday, “unlikely” was the most repeated expression among analysts when asked about that possibility. Now, the scenario is different: a blocked strait is a real possibility that’s on the table: the Iranian Parliament has put it there, after being besieged first by Israel and then by the U.S. The final say is in the hands of the Ayatollah Ali Khamenei. Whether he will take the step or not—a move that would also have suicidal overtones: it would be shooting himself in the foot—only he knows.

The blow would be particularly severe for Asia, for whom the crude oil and gas that pass through the strait represents up to 75% of its consumption. But the rest of the world would suffer with a sudden rise in the price of gasoline and diesel consumed by its companies and citizens. Inflation would skyrocket. And central banks would suddenly have no arguments for further interest rate cuts. Translated: there could be curves ahead, and not exactly gentle ones.

And this also applies to the United States, the country that shattered the fragile balance of power overnight with the strikes on Iranian nuclear facilities. Hormuz could be Tehran’s final answer; the point no one ever thought would be reached but which, barring a last-minute miracle, might be just around the corner.

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