Transit Fears Rise Over Strait of Hormuz

As the war between Israel and Iran continues, speculation continues to mount over whether Iran will seek to close the Strait of Hormuz. If the strait were to be effectively closed, the consequences could be huge. Jebel Ali, on the western side of the strait, is the largest port in the Middle East and the ninth largest in the world. All of Qatar’s gas is exported though the strait in LNG tankers. Saudi Arabia, Kuwait and the United Arab Emirates have alternative export routes avoiding the strait, but are still heavily dependent on the waterway for most of their crude exports. Iran also ships 90 percent of its exports to China through the strait. In total, with supply added in from Kuwait and Saudi Arabia, 45 percent of Chinese oil imports come through the strait.

To a degree, concerns about a possible closure are being fanned by a number of groups. Journalists unfamiliar with the region are accepting briefings without skepticism from government and intelligence officials, who may have agendas but not much detailed knowledge of the situation. Hardliners, both in Iran and amongst opponents, are seeking to intensify the conflict to serve their own interests. Normal military contingency planning and associated deployments - such as the deployment of British and US naval forces from Bahrain - are being misinterpreted as expressions of intent, rather than precautionary moves against an unlikely eventuality.

Hotheads and hardliners within Iran’s government may get their way and impose an irrational closure. But considering all the factors, the Iranians are unlikely to initiate such a move. Iran would suffer because of its loss of revenue-earning capacity. Iran would permanently lose its export markets, with China switching to more dependable, alternative suppliers, particularly at a time when there is crude over-supply. China, the last Security Council member with an inclination to support Iran but never a huge admirer, would likely abandon Iran politically. The battle to keep the strait open which would ensue would see Iran’s entire petrochemical infrastructure destroyed. This would please the Russians very much, because it would force oil prices higher, needed to fund their war in Ukraine.

Closer to home, Qatar has shared commercial links with Iran over jointly-owned gas fields. Oman has always maintained cordial links with Iran. Any attempt on Iran’s part to enforce a closure - for example by laying sea mines - would upset what are essentially neutral relationships, particularly if territorial waters were infringed. For Oman in particular, any Iranian attempt to interdict shipping on the Omani side of the Straits would be catastrophic for a carefully-nurtured relationship which is of greater value to Iran than Oman - any trust would be destroyed should there be armed clashes or drone strikes across meridian lines.

It is difficult to identify an advantage for any GCC state in a closure of the strait - only huge problems and potentially enormous risk to infrastructure, protection against which would force GCC countries into adversarial positions with Iran. Israel and America would want to nurture the economic strength of these countries in the post-war period through strengthened economic partnerships.

So far, oil markets expect Iran to act in its own best interests and leave the strait open, Eni CEO Claudio Descalzi told Reuters on Wednesday. After jumping about $10 after the first Israeli strikes last week, benchmark Brent crude prices have barely budged, suggesting that energy traders aren't overly concerned.

But even without a formal and declared operation to close the strait, a de facto reluctance to use the waterway may already be creeping into place. A quick glance around Iran’s oil exporting terminals on June 18 suggests that oil loading has completely ceased (following a reported export surge earlier this week). Nor is there any lifting taking place at the Iranian oil export terminal off Jask; indeed the single point mooring buoy offshore appears to have disappeared. Other states are taking precautions: Qatar has instructed arriving LNG carriers to wait for their port arrival slot by idling in the Gulf of Oman, minimizing their time at anchorage in the Arabian Gulf.

As insurance premiums creep up, so shippers will also look for ways to avoid the strait altogether. One such route opening up is a new road and border-crossing point between Saudi Arabia and Oman at Ramlet Khelah. A product of much improved Saudi-Omani relations in recent years, there are now good roads from Saudi Arabia (sandstorms permitting) both to Sohar and the container terminal at Salalah - which is well away from the Strait of Hormuz and Gulf of Oman danger area. With TIR agreements in place to cover the border crossing, trucked container traffic is already increasing markedly on the route.