What is the Strait of Hormuz and why does it matter?
The United States' entry into the Iran-Israel war over the weekend stoked fears of a wider conflict that could spread across the oil-rich Middle East and disrupt the global economy.
President Donald Trump announced Monday evening on social media that Israel and Iran had agreed to a "complete and total" ceasefire -- although neither country initially acknowledged the announcement.
Before Trump's announcement, investors’ concerns centered on the Strait of Hormuz, a narrow waterway and trading route off the Southern coast of Iran that facilitates the transport of about 20% of liquid petroleum consumed worldwide.
The Iranian parliament on Sunday approved closure of the Strait of Hormuz, though the final decision will be made by Iran’s Supreme National Security Council, Iranian state media reported. While Iran could disrupt the Strait of Hormuz through attacks on oil tankers, it's not clear how it could close the waterway — or if it has the capacity to do so. The Strait of Hormuz remains open.
Oil prices initially fell more than 6% on Monday in the immediate aftermath of an Iranian attack on a U.S. military base in Qatar. As of Monday afternoon, there were "no reports of casualties," according to a U.S. official. The sharp drop in oil prices resulted from a perception that the Iranian retaliation may be over, Patrick de Haan, the head of petroleum analysis at GasBuddy, said in a post on X.
Closure of the Strait of Hormuz could drive up the price of oil, hiking U.S. prices for gasoline and other goods, while slowing the global economy, experts said. But, they added, the move risks constraining Iran’s own oil exports and those of neighboring countries.
“The continued accessibility of the Strait of Hormuz is pivotal to the global economic outlook,” Jim Reid, a research strategist at Deutsche Bank, said in a memo to clients on Monday.
What is the Strait of Hormuz?
The Strait of Hormuz is a waterway that runs along the Southern coast of Iran and the Northern coast of Oman.
The passage marks the only shipping route that stretches from the Persian Gulf to the open ocean, making it a key travel hub for goods originating in oil-rich Gulf countries like Saudi Arabia, Qatar and Iran. At its narrowest point, the Strait of Hormuz is just 21 miles wide.
“We’re talking here about a very, very narrow geographic space, and the shipping lanes are even more narrow,” Adam Klein, director of the Robert S. Strauss Center for International Security and Law at the University of Texas at Austin, told ABC News. “This is a highly vulnerable, highly strategic chokepoint.”
Last year, an average of about 20 million barrels per day passed through the Strait of Hormuz, which amounts to roughly 20% of liquid petroleum consumed worldwide, according to the U.S. Energy Information Administration, or EIA, a government agency.
The vast majority of oil that passes through the strait is bound for Asian markets. Nearly 5 million barrels of oil arrived in China via the Strait of Hormuz each day last year, the EIA said, while about 2 million barrels of such oil ended up in India on a daily basis.
By comparison, the U.S. imported just 500,000 barrels of oil each day via the Strait of Hormuz.
The U.S. is a net exporter of crude oil, meaning the country produces more oil than it consumes. Since oil prices are set on a global market, U.S. prices move in response to swings in supply and demand.
“The closure of the Strait of Hormuz can cause prices U.S. consumers pay to rise,” Klein said, but he noted other nations could be more vulnerable since they rely more on oil that travels through the Strait of Hormuz.
Why does the Strait of Hormuz matter?
As a bottleneck for a large share of global oil, the Strait of Hormuz could become the site of a significant disruption of the global economy, some experts told ABC News.
Oil prices could surge from a current level of about $74 per barrel up to $120 per barrel if the Israel-Iran conflict damages Iranian oil infrastructure or impedes the passage of some oil tankers in the Strait of Hormuz, Ramanan Krishnamoorti, a professor of petroleum engineering at the University of Houston, told ABC News.
That scenario would amount to a more than 60% surge in oil prices, Krishnamoorti added, resulting in a proportionate hike for gas prices. The average price of a gallon of gas would climb from its current level of $3.22 to over $5, since crude oil makes up the key ingredient in auto gasoline.
"If we see any throttling back of the Strait of Hormuz, we'll see a massive increase in the price of oil," Krishnamoorti said.
That forecast of a potential price spike for oil matched a prediction from asset management firm Lazard, which warned last week of a possible escalation involving "strikes on Gulf energy installations or attempts to temporarily close the Strait of Hormuz."
Such a scenario would trigger "price increases upwards of $120 per barrel," Lazard said in a memo to investors.
A hike in the price of oil would not only increase the price of gasoline but could also push up prices for a range of other goods, since transport expenses will rise as shippers and truckers pay higher fuel costs.
EY, a global accounting firm, outlined a possible Iran War scenario of “significant escalation” that involves blockage in the Strait of Hormuz and attacks on ships in the Red Sea. Under such circumstances, the U.S. and global economies would likely enter a recession as a result of “severe supply chain strains and inflationary pressures,” EY said.
Still, Iran may opt against closing the strait. The move would impede Iran’s own oil exports, which make up a key source of revenue, and it would risk alienating Middle East neighbors, Klein said.
“It would turn countries against Iran that have thus far been on the fence,” Klein said. “Iran would be hurting those consumers and economies, as well as Israel and the U.S.”
