| By Hussain Shahid |

In the intricate web of global commerce, few corridors are as critical and as vulnerable as the Strait of Hormuz. Tucked between Iran and the Arabian Peninsula, this narrow 21-mile waterway is responsible for transporting nearly a fifth of the world’s daily oil supply and a significant share of liquefied natural gas (LNG), primarily from the Gulf to energy-thirsty economies in Asia.

The economic impact of a closure would be swift and severe. A mere disruption of this artery could send energy markets into turmoil, inflation spiraling, and global growth decelerating. Beyond numbers and market graphs lies a fundamental truth: the Strait of Hormuz is not just a regional chokepoint; it is the heartbeat of the global energy economy.

In 2024, around 20 million barrels of oil and a significant portion of global LNG transited daily through Hormuz. Countries such as China, India, Japan, and South Korea, collectively accounting for nearly 70% of crude volumes passing through the strait, are critically exposed. Any obstruction would upend their energy security and industrial productivity.

Markets have already shown jittery responses even to the threat of closure. In recent months, oil prices jumped 4-6%, and tanker freight rates surged by over 20% as geopolitical tensions flared in the Gulf. A full-scale shutdown would be a different magnitude altogether. Brent crude, currently averaging around $85 per barrel, could spike to $150 or even $200 under worst-case scenarios. The same pattern would play out in natural gas markets, especially in Asia and Europe, where dependence on LNG imports is high and strategic buffers are shallow.

Energy price volatility, historically tempered by spare capacity and strategic reserves, may no longer offer a reliable shield. Unlike past disruptions, where spare capacity from Saudi Arabia or the release of strategic petroleum reserves helped stabilize markets, a complete shutdown of the strait could overwhelm these buffers. Global spare capacity, already tightened by underinvestment and geopolitics, may simply not be enough to compensate for a 20 million bpd shortfall.

The ripple effect of skyrocketing energy prices would extend far beyond the oil market. Higher energy costs would fuel transportation and manufacturing inflation, directly impacting consumers and producers. The International Monetary Fund estimates that a 1% increase in oil prices translates to a 0.3-0.4 percentage point rise in global inflation. In today’s already inflation-prone global economy, such a spike could tip fragile recoveries into stagnation.

Central banks, caught between battling inflation and fostering growth, would face a dire policy conundrum. Monetary tightening might return just when many economies hope to pivot to rate cuts. The result could be a return of stagflation, a toxic mix of slowing growth and rising prices. Lower-income households and small businesses would bear the brunt, triggering job losses, shrinking purchasing power, and heightening inequality across both developed and developing nations.

Hormuz also serves as a conduit for petrochemicals, fertilizers, grains, and consumer goods. A shutdown would cripple global shipping logistics. Rerouting vessels around the Cape of Good Hope could add two weeks to delivery times, strain port infrastructure, and push up freight rates and insurance premiums, some by more than tenfold. Industries dependent on “just-in-time” models, such as automotive and electronics manufacturing, could face cascading delays and cost surges.

The global food system would not be immune. Fertilizer and grain shipments disrupted through the strait would raise input costs for agriculture, while higher fuel prices inflate logistics expenses. In turn, food prices, already vulnerable to climate and conflict, would climb, exacerbating insecurity in import-dependent nations.

Saudi Arabia’s East-West pipeline can carry around 5 million barrels per day, expandable to 7 million. The UAE’s Fujairah pipeline adds another 1.5 million bpd. However, the combined available bypass capacity of approximately 8 million bpd falls significantly short of the 20 million bpd that transit Hormuz. Critical exporters like Iraq, Qatar, and Kuwait lack meaningful alternatives altogether.

Strategic petroleum reserves (SPRs) offer short-term relief. The U.S. holds around 600 million barrels, Europe another 400 million, and Asia over a billion. But these are finite resources. At 20 million bpd of lost supply, even global SPRs could be exhausted within two months. In a prolonged closure scenario, even the most prepared economies would begin to strain.

Governments, multilateral institutions, and private sector actors must begin treating energy chokepoints as systemic risks. This means investing in redundancy, be it through diversified supply chains, strategic energy corridors, or alternative fuels. It also means improving diplomatic mechanisms to ensure uninterrupted maritime security in key routes like Hormuz.

In a world ever more connected by trade, one narrow waterway holds disproportionate sway over global economic stability. Its closure, even temporarily, would not just raise prices; it could reshape the trajectory of global growth for years to come.

Hussain Shahid (Shahid Hussain) is the founder and CEO of UAE-based consulting firm Green Proposition and writes about matters which shape Trade and Business in the global Market.