Opinion
By Yiannos Stavrinides
The Strait of Hormuz is the only maritime passage into the Persian Gulf. Every day, about 20 million barrels of oil pass through it, along with a comparable volume of LNG. These shipments include exports from Iran, Saudi Arabia, Kuwait, the UAE, and Qatar, which is the world’s largest LNG exporter. The de facto disruption of normal shipping through the Strait of Hormuz caused demand to fall by 80 percent, left oil tankers idle, and forced a halt to oil production because storage capacity is limited. The loss of supply is comparable to what occurred at the peak of the pandemic, although at that time the shock came from collapsing demand.
This unprecedented loss of productive capacity, combined with the absence of a reliable alternative, is creating serious concern. The shutdown of production in countries that hold the world’s largest oil reserves forced the International Energy Agency (IEA) to recommend the largest release of strategic reserves in history, totaling 400 million barrels.
Attacks on Qatar’s LNG energy facilities, which account for 20 percent of global demand, forced production to stop and triggered a chain reaction across energy markets. LNG infrastructure is highly specialized, and the logistics of transporting it are complex, which makes any alternative supply significantly more expensive.
Only a few days after the attacks on Iran began, gasoline prices surged by 30 to 60 percent across Asia and Europe. At the same time, Brent crude climbed above $100 and remained there from the start of hostilities.
There are few viable alternatives. Pipelines connecting Saudi Arabia to the Red Sea can handle only about 5 million barrels per day. Rerouting tankers around Africa would add weeks of delays, increase shipping costs, and require additional insurance coverage.
When energy prices rise, the consequences quickly spread to industry, agriculture, and transportation. A prolonged closure of the Strait of Hormuz would generate strong inflationary pressures and revive the familiar dilemma between high prices and economic growth. The economies of Europe and Asia, both net energy importers, would face shrinking GDP and weaker demand. Transportation sectors of every kind would also suffer, disrupting global supply chains. Financial markets would become more volatile across stocks, currencies, and bonds, pushing prices lower as investors retreat.
It has not been many years since the shock of 2022, yet Europe once again finds itself caught off guard by geopolitical developments. The start of military operations in Iran was immediately accompanied by rising natural gas prices on the Dutch exchange. Some estimates suggest prices could climb even higher if the conflict lasts longer than three months. At the same time, several European economies are revising their forecasts for inflation and growth, while the European Central Bank continues to monitor developments closely. For Europe, the energy issue is fundamentally existential. If the crisis persists, shortages could emerge. Rising living costs will fuel political tensions, while businesses that depend heavily on energy may be pushed toward bankruptcy.
Modern history offers no precedent for a closure of the Strait of Hormuz. The duration of this conflict will determine whether the global economy enters a prolonged energy crisis and recession. For now, the choices resemble those faced during the oil crisis of the 1970s. The consequences, however, could ultimately prove even more severe than the Arab oil embargo of 1973.
