Why U.S.-Iran Feud Keeps Focus on Strait of Hormuz

The Strait of Hormuz is once again a center of global tensions. The Middle East’s crude oil and natural gas flow through the narrow sea conduit to international markets, making it the world’s most critical transportation “chokepoint.” Incidents there — such as Iran’s seizure of a British tanker and attacks on ships in 2019 — can whipsaw energy prices and send shipping and insurance rates rocketing. Regional tensions flared again after the U.S. killed a top Iranian general in January 2020 and some shippers briefly avoided sending vessels through the strait. The Islamic Republic has periodically threatened to shut the vital waterway, prompting the U.S. and U.K. to step up their military presence amid calls to ensure it stays open.

 

1. Where is the Strait of Hormuz?

Shaped like an inverted V, the waterway connects the Persian Gulf to the Indian Ocean, with Iran to its north and the United Arab Emirates and Oman to the south. It’s about 96 miles (154 kilometers) long and 21 miles wide at its narrowest point, with the shipping lanes in each direction just two miles wide. Its shallow depth makes ships vulnerable to mines, and the proximity to land — Iran, in particular — leaves large tankers open to attack from shore-based missiles or interception by fast patrol boats and helicopters.

Critical Passageway

Attacks on oil tankers in 2019 raised tensions around the Strait of Hormuz

Sources: Marine Traffic, Bloomberg

2. What’s the strait’s role in global shipping?

It’s essential to the global oil trade. Tankers hauled about one third of the oil moved at sea through the strait – 20.7 million barrels a day of crude, condensate and refined fuels in 2018, according to the U.S. Energy Information Administration. The strait is also crucial for liquefied natural gas, or LNG, with more than a quarter of the world’s supply, mostly from Qatar, passing through it annually.

Oil Tanker Chokepoints

Volume of crude oil and petroleum liquids transported in 2018

Sources: Bloomberg Intelligence, EIA

3. Why would Iran disrupt the strait?

U.S. sanctions, particularly those aimed at stopping oil sales, have pushed Iran’s economy into recession, prompting President Hassan Rouhani to accuse the U.S. of waging “economic war” against his country. Disrupting the strait demonstrates that Iran has the power to inflict pain in return on the U.S. and its allies by restricting the flow of energy and driving up prices. Any boost in the price of oil can also help make up for the revenue Iran is losing from lower sales due to sanctions. “We certainly have the ability to” shut the Strait of Hormuz, Iranian Foreign Minister Javad Zarif said in July 2019, adding that Iran wouldn’t want to do so “because the Strait of Hormuz and the Persian Gulf are our lifeline.”

4. Could Iran really close the waterway?

Closing the waterway entirely would be self-defeating, preventing Iran’s own exports of petroleum and starving it of revenue. Oil traders doubt the country would ever go that far. Iran’s navy also is no match for the U.S. Fifth Fleet and other forces in the region. Iran is still capable of considerable disruption. In July 2019, its Revolutionary Guard, which is charged with maintaining the security of the Persian Gulf for the country, seized a U.K.-registered tanker, owned by Sweden’s Stena AB, in the strait. Iran said the ship had violated maritime rules. It also suggested the move was in retaliation for the U.K.’s seizure of an Iranian tanker near Gibraltar on suspicion of violating sanctions against Syria. The vessel was freed more than two months later, after the Iranian tanker was released from custody in Gibraltar. Earlier in July, the British Navy had intervened to prevent a tanker operated by BP Plc from being blocked by Iranian vessels as it passed through the strait.

Strait of Hormuz – A Timeline of 2019 Events

3th June: Tankers attacked
Two oil tankers damaged in a suspected attack near the entrance to the Persian Gulf. The U.S. blamed Iran, despite denials from Tehran.
20th June: Drone shot down
Iran shot down a U.S. Navy drone, which it claimed was in Iranian airspace. Trump downplayed the incident saying a “loose and stupid” individual — rather than Iran’s top leaders — may be culpable.
4th July: Tanker seized
British special forces seize a tanker carrying Iranian oil off the southern tip of Spain, which the U.K. says was breaching European Union sanctions against Syria. Iran says it wasn’t headed to Syria, and considered it “an act of piracy.”
11th July: Tanker escorted to safety
A Royal Navy frigate intervened to stop three Iranian vessels impeding a BP-operated tanker from passing through the Strait of Hormuz.
14th July: Tanker seized
Iran seized the Panamanian flagged Riah, saying it was smuggling fuel in the Persian Gulf. The U.S. demanded Iran release the ship and its crew and condemned the “continued harassment” of vessels.
18th July: Drone shot down
The USS Boxer destroyed an Iranian drone that approached the ship near the Strait of Hormuz. Iran denied it had lost a drone.
19th July: Tankers seized
Iran seizes the U.K.-flagged Stena Impero and stops another U.K.-linked tanker, the Mesdar, as they sailed through the Strait of Hormuz.

5. Has the strait been closed to traffic before?

No, but it has seen its share of conflict. During the 1980-1988 Iran-Iraq War, Iraqi forces attacked Iran’s oil export terminal at Kharg Island, in the Persian Gulf northwest of the strait, in part to provoke an Iranian retaliation that would draw the U.S. into the conflict. Although Iran didn’t try to shut the strait, there followed a so-called Tanker War during which culprits from both sides attacked 451 vessels, most carrying oil or refined petroleum products. That significantly raised the cost of insuring vessels, increasing the cost of oil exports. When sanctions were imposed on Iran in 2011, threats were again made to close the strait, but these were subsequently denied by Iran’s foreign ministry.

6. Can the strait be protected?

During the 1980s Tanker War, the U.S. Navy resorted to escorting vessels through the Gulf. In 2019, the U.S. dispatched an aircraft carrier and B-52 bombers to the Persian Gulf, but repeating the 1980s operation would tie up large parts of U.S. and allied fleets. President Donald Trump, in a Twitter posting in June 2019, questioned why American forces should be responsible for protecting ships from other countries as they make the “dangerous journey.” The U.K., Australia, Bahrain and the United Arab Emirates joined the U.S.-led International Maritime Security Construct, formerly known as Operation Sentinel, which was established in response to the 2019 attacks. South Korea is contributing personnel and Japan is sending a ship to waters outside the Strait of Hormuz. Owners of tankers that ply the Gulf face spiraling costs. War risk premiums paid every time a ship enters the region surged from $30,000 in early 2019 to $185,000 in June, while cargo rates more than doubled to $26,000 per day. The rates remained elevated into 2020.

7. Who relies most on the strait?

Iran, Kuwait, Qatar and Bahrain export all their exports of oil and, in the case of Qatar, LNG through the strait. Ninety percent of Iraq’s exported oil goes through it as well. The U.A.E. can partly bypass the strait by sending 1.5 million barrels a day via a pipeline from its oilfields to the port of Fujairah on the Gulf of Oman. Saudi Arabia has the greatest ability to divert flows from the risk zone, by using a 746-mile mega-pipeline across the country to an export terminal on the Red Sea. Saudi Aramco said the capacity of that line would be increased to 6.2 million barrels a day by the end of 2019 and would be able to transport 7 million barrels on a “temporary” basis. Aramco transported 2.1 million barrels a day of crude through the link in 2018. The East-West pipeline was attacked in May 2019 by an unmanned aerial vehicle carrying explosives, shutting it down briefly. While the higher oil prices triggered by any closure of Hormuz would hurt consumers everywhere, the biggest impact would be felt in Asia; two thirds of the crude passing through the strait in 2019 ended up in China, India, Japan or South Korea.

Source: Bloomberg

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