The Strait of Hormuz is now at the centre of Iranian and US calculus
The fate of the strait is directly linked to what happens next to the world economy. On Tuesday, two tankers were attacked as they transited
The fate of the strait is directly linked to what happens next to the world economy. On Tuesday, two tankers were attacked as they transited the Strait of Hormuz via a passage in Omani waters. Gulf countries responded by sharply condemning the attacks and blaming Iran. The United States then launched attacks on Iranian territory, to which Tehran responded by striking Bahrain and Kuwait. US President Donald Trump has now said the memorandum of understanding (MoU) that Iran and the US signed is void. This latest escalation illustrates how the Strait of Hormuz has become the central issue in the US-Israel war with Iran that began on February 28. Disagreements over the strait’s future have proven to be the hardest to resolve in the US-Iranian negotiations, as questions about Iran’s nuclear programme have been put to the side. The disruption of traffic in the Strait of Hormuz has an immediate and costly price tag attached, for Iran, for its Gulf neighbours, and for a global economy that has spent four and a half months absorbing the largest oil supply shock in the history of the modern market. Iran’s leverage is also its liability For Tehran, the strait is its strongest card – one that is also incredibly costly. Since the war began, Iranian forces have mined the strait, attacked vessels and cut traffic through the passage by roughly 95 percent. This has led to what the International Energy Agency’s Fatih Birol has called “the largest supply disruption in the history of the global oil market”. That leverage is real: about a fifth of the world’s oil and a fifth of its liquefied natural gas (LNG) normally move through Hormuz, and no amount of Gulf pipeline capacity can fully replace it. But Iran has effectively been strangling its own lifeline along with everyone else’s. Iranian crude, once sold for $3 a barrel less than international benchmarks, is now selling at a 20 percent discount.
The country’s oil exports collapsed by more than 90 percent in May as US naval enforcement squeezed its shadow fleet. Even before the war, the World Bank projected that Iran’s economy would contract in 2026. The impact of the collapse of oil sales will be far-reaching because of the closure. A 60-day US Treasury waiver issued on June 22, permitting Iran to sell oil at full market rates through August 21, but has now been renounced following the attacks on Tuesday. This is the economic backdrop to Iran’s insistence on asserting joint authority over the strait and floating a system of transit fees or “service charges” for passing ships. Washington has made clear that Iran cannot charge tolls in international waters governed by the right of transit passage under the Law of the Sea. For Tehran, the dispute is not really about toll revenue, which would be rather modest when compared to its oil income; it is about establishing precedent and sovereignty over a chokepoint that is its only real point of leverage once sanctions relief and frozen-asset release are negotiated. The latter is itself contested: Iran wants half of an estimated $25bn in frozen assets released immediately, while the US has resisted. A separate $300bn reconstruction fund floated in the MoU has already become a political flashpoint in Washington. The Gulf is paying for a crisis it didn’t start For the Gulf states, the Strait of Hormuz crisis has meant improvising around geography. Saudi Arabia has redirected crude through its roughly 1,200km (746-mile) East-West pipeline to the Red Sea port of Yanbu, and the UAE has leaned on the Habshan-to-Fujairah line to the Gulf of Oman. Together, though, these pipelines carry a fraction of what Hormuz once did, at best 7 million barrels a day of design capacity for the Saudi line and under 1.8 million for the Emirati one, against roughly 20 million barrels a day that transited the strait before the war.
The BriefWire