The Strait of Hormuz is effectively closed, Iran declared Monday, escalating a conflict with the United States and Israel that began with the killing of Supreme Leader Ayatollah Ali Khamenei on February 28th. The declaration, made by Ebrahim Jabari, a senior advisor to the commander in chief of the Islamic Revolutionary Guard, threatens a critical artery of the global oil supply and has, so far, failed to trigger a dramatic surge in prices.
With roughly 20 percent of the world’s oil passing through the narrow waterway, the potential for economic disruption is immense. Yet, oil prices have stabilized at just above $80 a barrel, a level maintained for over two years prior to the recent hostilities, despite fears of panic buying and a potential spike to $200 a barrel. Analysts attribute this relative calm to a belief that the conflict will be short-lived.
“$200 a barrel, we would say, is an extreme worst-case scenario,” Rabobank analyst Ben Picton told the ABC. “We think that, given what we know at the moment, $85 a barrel is more likely in the near term. But if we do see Hormuz closed for an extended period, we might see $130 a barrel or slightly more.”
The situation presents a complex challenge for U.S. President Donald Trump, who campaigned on a promise to finish “forever wars.” Pressure to swiftly conclude the conflict is compounded by the approaching midterm elections and concerns about inflation. While past disruptions to shipping in the Strait of Hormuz have been limited, a complete closure now presents a different threat. Iran has stated it will attack any vessel attempting passage.
The alternative route for Middle East oil, a pipeline across Saudi Arabia to the Red Sea, lacks the capacity to handle a significant diversion of supply. Iran has already begun targeting energy infrastructure, including the Raz Tanura refinery in Saudi Arabia, which was forced to shut down Tuesday following a drone attack. Approximately 112 tankers, including 70 jumbo tankers, are currently trapped in the Gulf, carrying around 20 million barrels of oil and gas.
The potential for rising oil prices, including those in the United States, poses a significant risk to Trump’s re-election prospects. While the U.S. Is largely energy independent, it still relies on Middle Eastern oil for specific refining needs, alongside imports from Canada and Mexico. A major disruption could delay anticipated interest rate cuts and potentially force the Federal Reserve to raise rates.
China’s energy security is also deeply affected. For years, Beijing has secured discounted oil supplies from sanctioned nations like Venezuela, Iran, and Russia. However, recent U.S. Actions, including the capture of Venezuelan President Nicolas Maduro and his wife, have curtailed those supplies. With Iran now embroiled in conflict, China’s access to a key energy source is further threatened. Iran produces approximately 3 percent of global oil supplies and exports nearly 90 percent of it to China.
China also relies heavily on liquefied natural gas (LNG) from the Persian Gulf, particularly Qatar. Production at Qatari facilities was halted this week after being targeted by Iranian drones, leaving Chinese industry vulnerable. Australia and the United States are currently operating near full capacity, offering limited capacity to fill the shortfall.
The situation has prompted speculation about a potential shift in Trump’s strategy, with some traders invoking the “TACO” – Trump Always Chickens Out – trade, betting that the President will seek a quick resolution to avoid economic fallout. Trump is scheduled to meet with Chinese President Xi Jinping in approximately one month to discuss trade and other issues, adding another layer of complexity to the situation. China’s dominance in the refining and production of rare earth minerals gives it significant leverage in negotiations with the U.S.
The long-term implications of the conflict remain uncertain, with the possibility of regime change in Iran or a broader geopolitical realignment. As of Wednesday, the U.S. Navy had sunk an Iranian warship, the IRIS Dena, off the coast of Sri Lanka, marking a rare instance of a submarine sinking a surface warship since World War II and highlighting the expanding scope of the military campaign. Sri Lanka has taken control of another Iranian vessel, the IRIS Bushehr, after it sought assistance near its coast.
