The effective closure of the Strait of Hormuz, a key waterway through which about 20% of the world’s crude oil and natural gas normally passes, has jolted global energy markets.
“When analysts look at the things that can go wrong in global oil markets, it’s about as wrong as any failure point can go,” says Kevin Book, co-founder of research firm Clearview Energy Partners.
Traffic through the strait, normally busy with Iran, faded in the first few days of the conflict He announced that the strait was closed and attacked the few ships that attempted the passage.
Global crude oil prices – already elevated due to the threat of war – rose more than 10% after the US and Israel attacked Iran. Natural gas prices have risen even more sharply in Europe and Asia, which rely heavily on imported liquefied natural gas, or LNG.
About 20 million barrels of oil per day normally pass through the strait. Some countries, including the US, have stockpiles and some producers in the Gulf region may redirect oil from the strait to other ports. But those changes can’t make up for all the shortfalls.
Recent attacks have hit oil and gas infrastructure in nearby countries, including Saudi Arabia, Qatar and the UAE. This raises questions about the viability of some alternative routes for oil. And if infrastructure is damaged, the hit to production and exports will outweigh even the closure of the strait.
Meanwhile, the closure of the strait has cascading effects for the industry. Iraq, a major oil producer, has had to shut down production at some of its biggest oil fields because it can’t export it through the Strait of Hormuz, which has nowhere to go. put That oil.
“We are now facing the biggest energy crisis since the oil embargo of the 1970s,” says Helima Croft, global head of commodity strategy at RBC Capital Markets.
‘Insurance-driven shutdown’
Iran has often threatened to close the Strait of Hormuz, but has never actually tried before.
And remarkably, Iran did not need a naval blockade to shut down traffic. It did not use underwater mines or rely on anti-ship missiles, but focused on selectively deploying much cheaper technology.
“(Iran) has had to carry out several drone strikes near the Strait of Hormuz,” Croft says. “And all of a sudden, insurers and shipping companies decided it was unsafe to pass that waterway’s very narrow S-curve.”
“It’s really an insurance-driven breakdown,” he says. Insurers do not underwrite ships and companies do not risk passage without coverage.
Many experts braced for repetition The “Tanker War” of the 1980s It was part of the wider Iran-Iraq conflict, when warships escorted tankers through the strait, avoiding mines and missiles. The insurance-driven shutdown was not what they expected — and it seems to have caught the White House off guard, Kraft notes.
On Tuesday, President Trump announced The US government will provide naval escorts to protect the tankers – as it did in the tanker war – and in addition, the US Development Finance Corporation, or DFC, will provide reasonably priced “political risk insurance” to all shipping lines operating in the Gulf. The DFC, established during the first Trump administration, offers that type of insurance in politically risky situations where it serves US strategic interests. The agency cited NPR for a statement saying It is ready to “mobilize” its products in the Middle East.
Will it be enough to put a large number of ships back through the strait? Some experts are skeptical.
William Henagan, a fellow at the Council on Foreign Relations, says there are both legal and financial limits on what DFC companies can realistically be able to provide. Legally, DFC To be sure Companies follow certain environmental and social standards and work in specific countries.
And financially, there’s a reason insurers hold back on covering ships through the Straits. “Even if you offer a subsidized price,” says Henagan, “it’s a war zone. Some boats are going to sink and DFC will have to pay the insurance.”
The agency has a limited budget. He says that “all maritime trade” in the region cannot feasibly be insured. Approving applications also takes time, Hengan notes.
And, of course, even if they can get insurance coverage, many companies still don’t want to risk losing their ships.
Stamatis Tsantanis, president and CEO of Greece-based shipping companies Cenergy Maritime and United Maritime, said in an emailed statement to NPR that the proposal for escorts and insurance is a “welcome step,” but that normal traffic will not resume until the companies believe the voyage is “truly safe.”
“The priority of the industry is not just to transport cargo, but to protect the lives of seafarers, the value of ships and to avoid a major environmental disaster if a tanker is seriously hit in such a narrow and sensitive waterway,” says Tsantanis.
