Multiple vessel attacks near the Strait of Hormuz, a narrow waterway that is only 33 km wide at its narrowest point and is responsible for transporting an estimated 17–20 million barrels of oil per day—roughly one-fifth of the world’s petroleum consumption—shook the world’s energy markets. At least two ships were hit and a third exploded close by in the incidents, which were reported by the UK Maritime Trade Operations (UKMTO). This sparked concerns about a potential disruption to the world’s energy supply.

Approximately 20% of the world’s liquefied natural gas (LNG) flows and 30% of the world’s seaborne oil trade pass through this corridor every day, according to data from the International Energy Agency (IEA). This route is crucial for major exporters like Saudi Arabia, Iraq, the United Arab Emirates, Kuwait, and Qatar. Millions of barrels are taken out of international markets every day by even brief disruptions.

US West Texas Intermediate (WTI) increased to almost $70 per barrel in early Asian trading, while Brent crude futures increased by over 10% intraday, briefly surpassing the $80 per barrel barrier before easing to about $76 per barrel. This was one of the biggest one-session spikes in oil prices this year. According to analysts, prices could swiftly reach $90–$100 per barrel if flows through Hormuz were cut by just 3–5 million barrels per day.

Shipping has slowed considerably. More than 150 oil tankers were anchored outside the Gulf instead of risk transit, according to vessel-tracking data. In high-risk conflict areas, insurance rates for ships operating in the area have reportedly increased by as much as 300–500%. The cost of transportation has increased by millions of dollars per voyage due to the sharp increase in freight rates for Very Large Crude Carriers (VLCCs).

Although the producer alliance OPEC+ has declared a 206,000 barrels per day increase in output, this amount is hardly 1% of the daily volume that passes through Hormuz, so many analysts doubt that it will be sufficient to compensate for the extended disruption. Short-term shocks could be mitigated by the world’s spare production capacity, which is estimated to be between 4 and 5 million barrels per day and is primarily held by Saudi Arabia and the United Arab Emirates. However, prolonged conflict would put a strain on these buffers.

Consumers are directly impacted by rising crude prices. Depending on taxes and currency exchange rates, the price of gasoline usually increases by 7–15 cents per litre for every $10 increase per barrel in many countries.

Major importers including India and Japan and various European countries will face higher account deficits because oil prices will increase by $20 to $30 per barrel. The import expenses will increase by billions each year which will create additional strain on currencies that already face weaknesses. The increase in crude oil prices leads to higher costs in transportation and manufacturing and aviation and agriculture which will result in 15 to 40 percent higher global freight expenses and 0.5 to 1 percentage point inflation increases for many economies during prolonged price increases. Central banks need to control both economic expansion and inflation rates through their current policies which will prevent them from implementing rate cuts until economic growth slows. Equity markets record strong responses to geopolitical shocks which result in market declines between 2 and 5 percent within a few days while investors turn to safe-haven assets such as gold and the US dollar.

The US has become a major oil producer because it produces approximately 13 million barrels of oil every day yet the country still depends on international oil markets which causes overseas disturbances to increase domestic gasoline prices. The United States experiences a direct gasoline price increase of approximately 20 to 25 cents per gallon when crude oil prices rise by 10 dollars per barrel because the country imports less Gulf oil than it did in previous decades. American consumers would experience substantial increases in fuel and transportation expenses if crude oil prices reach $90 to $100 per barrel. Energy consumption constitutes 7% of the US Consumer Price Index because its effects on food production and aviation and trucking and manufacturing operations create more inflationary pressure. Higher fuel expenses will decrease household available money because Americans use approximately 9 million barrels of gasoline daily. Financial markets react quickly to Gulf-related disruptions; previous incidents have caused equity markets to drop between 2 and 4 percent while defense and energy stocks experience increases. The United States needs to increase its naval forces in the Gulf to respond to ongoing conflicts which will drive up both military costs and international tensions. The United States maintains its position as a key energy producer yet the country remains economically exposed to ongoing unrest in this vital sea transportation route.

Prolonged instability will disrupt global supply chains by raising insurance and shipping expenses to multiple hundreds of percent in dangerous areas and creating business investment obstacles through market unpredictability. The Hormuz disruption creates an energy crisis which develops into an economic emergency that leads to inflation and trade deficits and currency instability and decreased international economic growth.

Risks of inflation are also substantial. In developed economies, energy makes up about 7–10% of consumer price indices; in emerging markets, this percentage is higher. Food prices and manufacturing costs may rise due to rising fuel and transportation costs, which could contribute 0.5 to 1 percentage point to headline inflation if high prices continue for several months.

Geopolitical energy shocks frequently cause financial markets to react violently. Global equity markets have dropped 2–5% in a matter of days during past Hormuz-related crises, but gold prices have generally increased as investors look for safe-haven assets.

Companies may reroute vessels via longer passages if commercial shipping continues to avoid the area. For instance, shipping between Asia and Europe can be delayed by 10 to 14 days by rerouting ships around southern Africa rather than through the Suez Canal, which can result in a 40% increase in fuel consumption and freight costs.

Global supply chain strains would also be exacerbated by disruptions close to the Bab el-Mandeb Strait, another vital maritime route. When combined, these chokepoints manage trillions of dollars’ worth of annual global trade.

Oil prices may reach $100 per barrel, a level not regularly observed since recent global energy shocks, if the unrest continues for weeks or months. Long-term price increases could spur investment in alternative energy, since renewable capacity additions already surpass 300 gigawatts annually worldwide. Although releases only offer short-term respite, governments could also release strategic petroleum reserves. For instance, the US Strategic Petroleum Reserve currently contains between 350 and 370 million barrels.

The circumstance highlights how susceptible the world’s energy markets are to geopolitical hot spots. Since almost one-fifth of the world’s oil supply travels through a single, constrained corridor, even small-scale conflict has the potential to cause global economic disruptions. Whether this is a temporary uptick or develops into a long-term worldwide energy crisis will depend on how long and how big the disruption is.

Prof. Neeraj A Sharma

Honorary Consul General

Republic of Palau to India

© Greater Kashmir