Hormuz: A Strait of Global Economic Peril

The Strait of Hormuz, a narrow waterway linking the Persian Gulf to the Gulf of Oman, has become a focal point of global economic peril. The Iranian parliament’s vote to potentially shut down this vital shipping channel, through which a fifth of the world’s oil consumption flows, in retaliation for a US attack, poses an existential threat to global energy security. The International Monetary Fund chief, Kristalina Georgieva, has warned that US strikes on Iran could inflict significant damage on global economic growth, largely due to the ensuing surge in oil prices.
A closure of the strait would trigger an unprecedented oil supply shock, inevitably leading to a dramatic increase in energy prices, heightened inflationary pressures, and a substantial slowdown in global economic expansion. While oil prices initially surged over 5% on Sunday to a five-month high of $81.40, they later pared some gains, with Brent crude settling near $76 a barrel on Monday.
However, the potential for much higher prices persists, with Goldman Sachs estimating that oil could hit $110 a barrel if Hormuz flows are halved for a month and then remain 10% lower for the subsequent eleven months. This forecast underscores the catastrophic economic consequences of a prolonged disruption in this critical waterway.
In a diplomatic effort to avert such a crisis, US Secretary of State Marco Rubio has forcefully stated that closing the strait would be “economic suicide” for Iran, appealing to China to exert its influence given its heavy reliance on Hormuz for oil. Meanwhile, analysts at RBC Capital Markets are cautioning against complacency, highlighting a “clear and present risk of energy attacks” from Iranian-backed militias and emphasizing the fluidity of the current geopolitical landscape.