War throttles trade route
What to know about Strait of Hormuz, key to world energy supply
Two traditional dhows sail by a large container ship May 19, 2023, in the Strait of Hormuz.
The Iranian Revolutionary Guard holds drills Feb. 16 in the Persian Gulf.
MIDDLE EAST
The widening war in Iran ground tanker traffic through the Strait of Hormuz to a halt and oil prices soared, highlighting the important role the narrow passageway plays in global energy supply.
The strait is the narrow mouth of the Persian Gulf through which about a fifth of the world's oil passes. Tankers traveling through the strait, which is bordered in the north by Iran, carry oil and gas from Saudi Arabia, Kuwait, Iraq, Qatar, Bahrain, the United Arab Emirates and Iran.
Any disruption to that traffic is highly disruptive to the oil trade.
"The scale of what is at stake cannot be overstated," said Hakan Kaya, senior portfolio manager at investment management firm Neuberger Berman. He said a partial slowdown lasting a week or two could be absorbed by oil companies but a full or near-full closure lasting a month or more would push crude oil prices "well into triple digits" and European natural gas prices "toward or above the crisis levels seen in 2022."
Essential corridor
The Strait of Hormuz is a bending waterway, about 21 miles wide at its narrowest point. It connects the Persian Gulf to the Gulf of Oman. From there, ships can travel to the rest of the world. While Iran and Oman have territorial waters in the strait, it's viewed as an international waterway that all ships can ply.
The strait was historically important for trade, with ceramics, ivory, silk and textiles moving from China through the region. Today, it is the route for supertankers carrying oil and gas, the vast majority of which goes to markets in Asia — including Iran's only remaining oil customer, China.
While there are pipelines in Saudi Arabia and the UAE that can avoid the passage, the U.S. Energy Information Administration says "most volumes that transit the strait have no alternative means of exiting the region."
Threats to the route spiked global energy prices in the past, including during the Israel-Iran war in June.
Is it closed?
Iran attacked several ships in the Strait of Hormuz and threatened ships that try to pass through, effectively closing it.
"The Strait of Hormuz is closed," declared Iranian Brig. Gen. Ebrahim Jabbari, an adviser to the paramilitary Revolutionary Guard, vowing that any ships that passed through it would be set on fire.
In the past, Iran harassed shipping though the narrows, and during the 1980s Iran-Iraq war, both sides attacked tankers and other vessels, using naval mines to shut down traffic at points. But Iran had not carried out repeated threats to close the waterway since the 1980s, even during last year's 12-day war when Israel and the U.S. bombarded Iran's key nuclear and military sites.
In mid-February, Iran temporarily shut down parts of the strait for what it said was a military drill. Oil prices jumped about 6% in the following days.
U.S. President Donald Trump moved March 3 to protect tankers in the strait. On social media, he said he ordered the U.S. development finance arm to provide political risk insurance for tankers carrying oil and other goods through the Persian Gulf "at a very reasonable price" after marine insurers canceled or raised rates for insurance in the region.
Political risk insurance is a type of coverage intended to protect firms against financial losses caused by unstable political conditions, government actions or violence.
Trump also said, if necessary, the U.S. Navy would escort oil tankers through the Strait of Hormuz. The Navy has at least eight destroyers and three smaller, littoral combat ships in the region. These ships previously were used to escort merchant shipping in the region and in the Red Sea.
Operations suspended
Global shippers issued service alerts saying they suspended operations in the area.
Danish shipping company Maersk, the world's biggest shipping company, said March 1 that it suspended all vessel crossings in the Strait of Hormuz until further notice. Other ocean carriers including Hapag-Lloyd, CMACGM and MSC made similar announcements.
"Those ships that got stuck in the Gulf are not going anywhere," said Tom Goldsby, logistics chairman in the Supply Chain Management Department at the University of Tennessee. "There's also a whole host of ships that were heading into the Gulf to replace them, and of course they're anchored or going elsewhere now."
About 3,200 ships, or about 4% of global ship tonnage, are idle inside the Persian Gulf, according to estimates by Clarksons Research, which tracks shipping data. Yet that includes about 1,231 ships that likely only operate within the Gulf. About 500 ships, or 1% of global tonnage, are "waiting" outside the Gulf in ports off the coast of the UAE and Oman, according to the firm.
