Why the Strait of Hormuz Is a Global Oil Flashpoint

(Bloomberg) -- The Strait of Hormuz, a narrow waterway at the mouth of the Persian Gulf, is rarely far from the center of global tensions. A major shipping route that handles around one-third of the world’s waterborne oil, it’s closely watched for signs of disruption. Iranian forces have targeted merchant ships traversing the chokepoint several times since early 2019 amid rising tensions with the U.S. and its allies. In January 2021, Iran seized a South Korean tanker sailing through the area. While Iran has threatened to block transit in the past, the strait has always remained 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 almost 100 miles (161 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 patrol boats and helicopters.

2. What’s its role?

It’s essential to the global oil trade. Tankers hauled nearly 12 million barrels per day of crude and condensate from Saudi Arabia, Iraq, Kuwait and the UAE through the strait in 2020, according to data compiled by Bloomberg. The strait is also crucial for liquefied natural gas, or LNG, with a quarter of the world’s supply -- mostly from Qatar -- passing through in 2020.

3. What’s been happening?

The Islamic Revolutionary Guard Corps detained a South Korea-flagged ship carrying petrochemicals as it traversed the strait on its way to the UAE on Jan. 4. Iran linked the detention to a dispute over $7 billion of its funds trapped in South Korea because of U.S. sanctions on the Islamic Republic. Several other tankers have been seized, including the U.K.-flagged Stena Impero in mid-2019. Iranian forces also boarded a small tanker in August 2020 in the Gulf of Oman and shot down an American spy drone flying over the strait in 2019. Several companies have temporarily suspended shipping via the route in the past because of security concerns.

4. Why would Iran disrupt shipping?

U.S. sanctions aimed at stopping oil sales have battered Iran’s economy, which has been shrinking since 2018. By disrupting the strait, Iran shows it has the power to hit back at the U.S. and drive up crude. Any boost in the price of oil also helps make up for the revenue Iran is losing due to the sanctions. Joe Biden has signaled he wants to use his presidency to improve U.S. relations with Iran. But tensions between the two countries have worsened due to the sanctions, the U.S. assassinating a top Iranian general in early 2020, and the killing of a leading Iranian nuclear scientist later in the year, which Iran accused Israel of orchestrating. The Islamic Republic said in January 2021 that the U.S. owes it $70 billion in compensation for the oil sanctions and that it would increase its nuclear activities by enriching more uranium.

5. Has Iran ever closed the strait?

Not so far. During the 1980-88 war between Iraq and Iran, Iraqi forces attacked an oil export terminal at Kharg Island, 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 the Tanker War in which the sides attacked 451 vessels between them. That significantly raised the cost of insuring tankers and helped push up oil prices. When sanctions were imposed on Iran in 2011, it threatened to close the strait, but ultimately backed off. Oil traders doubt the country would ever close the strait entirely because that would prevent Iran from exporting its own petroleum. Moreover, Iran’s navy is no match for the U.S. Fifth Fleet and other forces in the region.

6. Can it be protected?

During the Tanker War, the U.S. Navy resorted to escorting vessels through the Gulf. In 2019 it dispatched an aircraft carrier and B-52 bombers to the region. The same year, the U.S. started Operation Sentinel in response to Iran’s disruption of shipping. Nations including the U.K., Australia, Bahrain and the UAE have since joined the operation, known now as the International Maritime Security Construct.

7. Who relies most on the strait?

Saudi Arabia exports the most oil through the Strait of Hormuz, though it can divert flows by using a 746-mile pipeline across the kingdom to a terminal on the Red Sea. The UAE 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. Some of Iraq’s oil is shipped by sea from the Turkish port of Ceyhan, but 85% travels through the strait, making it highly reliant on free passage. Kuwait, Qatar and Bahrain have no option but to ship their oil through the waterway.

The Reference Shelf

• Bloomberg coverage of Iran’s seizure of a South Korean ship in January 2021 and boarding of a small tanker in August 2020.
• Tankers were attacked in and around the Strait of Hormuz in 2019 in May, June and July.
• Bloomberg stories on tanker attacks rattling shipping and insurance industries and driving up war risk premiums.
• QuickTakes on the U.S.-Iran conflict and the Iran nuclear deal’s uncertain path under Biden.
• A U.S. Energy Information Administration report on World Oil Transit Chokepoints.
• Bloomberg Opinion columns by James Stavridis on how Iran’s provocations are a warning shot to Biden and Bobby Ghosh on how a dismal 2020 everywhere was even worse for Iran.

©2021 Bloomberg L.P.