The strait of Hormuz, in the Persian Gulf, is 21 miles across at its narrowest point and connects the world’s major oil producers with their markets overseas. Approximately 14 huge oil tankers pass through the strait per day carrying on average 17 million barrels of oil which equates to 20% of the world’s supply. Since the oil crisis years of 1973 (oil price up 400%) and 1979 (up 200%) the straight has been know as the most vulnerable economic ‘chokepoint’.
Iran has threatened to close the straight if any further sanctions were imposed on them (due to its contentious nuclear programme). They can easily follow through on their threat by deploying a stockpile of 2,000 mines.
So what would be the economic impacts if Iran did close the strait:
– It is predicted that oil prices will rise by 50% in a matter of days – US$160/barrel
– Fuel prices would follow suit and industrial economies would be hit hard by cost-push inflation- see graph below.
– China, which gets 50% of its oil imports from the area, would find it difficult to adjust to oil shortages
– Iran rely on oil revenue for 50% of its national budget. Oil is 80% of its export revenue.
Will it close?
For Iran to close the Strait would be like ‘shooting themselves in the foot’ – the Iranian economy would go through a major downturn with no doubt increasing inequality and levels of poverty. From 1st July this year the EU will put an embargo on Iranian oil imports to Europe worth about €13bn to Iran. The West know that Iran can’t do without oil revenue.