The Impact of the Strait of Hormuz on Oil Prices
The tensions in Iran and the impact it may have on the UK’s Energy
If you follow the news, you’re likely to have heard about the crisis in the Gulf following a series of incidents. These events have caused significant tension between Iran and Western countries, and many fear that we could be on the brink of war.
Timeline of events
A lot of the issues can be traced back to the US withdrawing from the Iran nuclear deal a year ago, with President Trump stating that it was not strong enough.
The P5+1 deal, which was agreed in 2015, is a long-term deal for Iran’s nuclear programme with a number of world powers, including the US, UK, France, Germany, China and Russia.
This came after years of tension over Iran’s alleged efforts to develop a nuclear weapon, with Iran insisting that the programme was entirely peaceful. The accord saw Iran agree to limit its sensitive nuclear activities and allow international inspectors in, in order to remove the economic sanctions placed on the country.
In addition to the US pulling out of this agreement they also placed sanctions on Iranian crude oil experts, giving waivers to select countries in order to limit the impact, but this is where tensions began to mount.
There were two tankers hit with explosions, which were credited to terrorists in Yemen.
In the weeks following, there were another two tankers explosions which the US blamed Iran for.
Iran then shot down a US drone claiming it was flying in its airspace, the US retaliated with cyber-attacks in response.
Then the British Royal Marines helped to seize an Iranian tanker, Grace 1, off Gibraltar, due to evidence that it was carrying oil to Syria, breaching EU sanctions. Iran called this act “piracy” and threatened to seize a British oil tanker if their ship was not released immediately.
Iran tried to seize two British-flagged oil tankers, failing once but succeeding with the second. The tanker and crew was diverted to one of its ports, a move that a government claimed is illegal. A spokeswoman said “(the government is) deeply concerned about Iran’s unacceptable actions which represent a clear challenge to international freedom of navigation.”
The US then shot down an Iranian drone, claiming it was flying too close to one of its warships.
All of this has taken place in the Strait of Hormuz, one of the world’s most important shipping routes, which has the potential to cause significant economic impact around the world.
If war does break out, the consequences are likely to be devastating.
Pressures Mounting on All Sides
US President Donald Trump caused a sensation by delivering a campaign of “maximum pressure” on Iran, causing many to fear military conflict, following the attack on the tankers in the Gulf of Oman.
This approach – not Iranian actions – has been stated as being the original source of rising tensions between Iran and the West.
The EU delivered plans for a maritime force to defend shipping in the Strait of Hormuz, however this has been rejected by the Iranian vice-president, Eshaq Jahangiri, stating that such a move to protect the Gulf would only bring insecurity.
Iran’s foreign minister, Mohammad Javad Zarif, congratulated new UK prime minister, Boris Johnson, with the message, “Iran does not seek confrontation. But we have 1,500 miles of Persian Gulf coastline. These are our waters and we will protect them.”
The European mission focuses on ensuring free navigation through one of the world’s most important waterways, although categorically stating it would not form part of the USA’s “maximum pressure” policy.
French Foreign Minister, Jean-Yves Le Drian, said, “On the diplomatic front we want to create the conditions for inclusive regional talks on maritime security, this is the opposite of the US policy of maximum pressure.”
This move presents evidence of just how strained the relationship between the US and the UK, as well as Europe in general, have become.
The Importance of the Strait of Hormuz for UK Energy
The Strait of Hormuz is one of the world’s most important oil passageways and the impact it can have if access is denied would be colossal.
Every day, nearly 21 million barrels of oil go through this passage via oil tankers, that’s approximately a fifth of the world’s oil. But it also offers transport for liquefied natural gas from Qatar, the biggest global producer of LNG, which exports nearly all of its gas through the strait.
It’s a vital route for the main oil and LNG exporters in the Gulf region, and although there are some other routes for oil – such as land-based pipelines – the capacity is significantly lower than by ship, with a total full capacity of roughly 6.8 million barrels a day.
Oil going through the Strait of Hormuz in 2018 largely went to China, Japan and India with South Korea and the USA also receiving shipments. The UK does receive some oil through the strait, but the bigger impact of this crisis comes from the LNG, of which the UK receives roughly a third of its supply.
If the Strait of Hormuz became inaccessible, as many experts believe is likely with conflict, then we could see many of the world’s major economies suffer considerably.
With increased attacks, oil and gas prices are likely to see a significant spike which, if a long-term conflict is engaged, could tip many economies into recession. It’s also likely that we’d see accelerated funding and support of renewable power sources to reduce dependency on fossil fuels.
Limitations on exports from this region would put a strain on global supply, likely causing a significant spike in the cost of oil, which is likely to raise demand, and therefore cost, on other commodities. The impact on prices can be seen in our full market analysis for July 2019.
About the Author
This post has been taken from the “Not the Norm” section of our monthly energy markets report, compiled by our Trading Desk for July 2019. If you’d like to receive regular updates on the state of the markets and find out more about influencing factors then you can sign up by following the link below:
How the Strait of Hormuz Affects Global Oil Prices
The Strait of Hormuz is a narrow waterway between the Persian Gulf and the Gulf of Oman, measuring just 21 miles wide at its narrowest point. It is the only sea passage from the Persian Gulf to the open ocean, making it a critical chokepoint for global energy supplies. Any disruption, whether from military conflict, political tension, or even the threat of closure, can cause immediate spikes in oil prices due to fears of supply shortages.
Oil prices are highly sensitive to geopolitical risk. When tensions rise in the region, traders factor in the possibility of reduced supply, leading to a risk premium on crude. For example, following the attacks on tankers in 2019, Brent crude prices rose by several dollars per barrel within days. Even without an actual closure, the perception of increased risk can drive prices upward, affecting businesses and consumers worldwide.
The impact is not limited to crude oil. The strait also carries about 20% of the world's liquefied natural gas (LNG), primarily from Qatar. A disruption would affect gas prices, electricity generation, and heating costs, particularly in countries reliant on LNG imports. For the UK, which imports a growing share of its gas, this could mean higher energy bills and increased volatility in wholesale markets.
Historical Precedents and Market Reactions
The Strait of Hormuz has been a flashpoint before. During the Iran-Iraq War in the 1980s, both sides attacked oil tankers in the so-called "Tanker War," leading to a significant reduction in shipping and a spike in insurance costs. Oil prices fluctuated wildly, and global supply was disrupted for months. More recently, in 2011-2012, Iran threatened to close the strait in response to sanctions, causing oil prices to jump by over 20% in a matter of weeks.
These historical episodes demonstrate that even the threat of closure can have a profound effect on markets. Shipping companies may reroute or delay voyages, insurance premiums rise, and some vessels avoid the area altogether. This reduces the effective supply of oil available to the market, even if the strait remains physically open. The result is higher prices and increased volatility, which can ripple through the global economy.
For UK businesses, this translates into higher energy costs. Many companies are exposed to fluctuations in oil and gas prices, either directly through fuel costs or indirectly through electricity prices, which are often linked to gas. A sustained period of tension in the Gulf could therefore squeeze profit margins and increase operating expenses for businesses across the country.
Alternative Routes and Their Limitations
While some oil can bypass the Strait of Hormuz via pipelines, the capacity is limited. The main alternative pipelines are the Saudi East-West Pipeline (also known as Petroline) and the Abu Dhabi Crude Oil Pipeline. Together, they can transport approximately 6.8 million barrels per day, compared to the 21 million barrels that pass through the strait. This means that even if pipelines are used at full capacity, a significant portion of Gulf oil would still be stranded in the event of a closure.
Moreover, pipelines are not immune to disruption. They can be targeted by attacks or suffer technical failures. In May 2019, drones attacked pumping stations along the Saudi East-West Pipeline, temporarily halting operations. This incident underscored the vulnerability of alternative routes and highlighted the strategic importance of the strait.
For LNG, there are no viable pipeline alternatives from Qatar. The country's LNG exports rely entirely on shipping through the strait. Any closure would remove a major source of global gas supply, leading to sharp price increases and potential shortages in importing countries, including the UK.
Implications for UK Energy Security
The UK is not directly dependent on oil from the Strait of Hormuz for its own consumption, as it sources crude from the North Sea, Norway, and other regions. However, the UK is part of a global oil market, and prices are set internationally. A disruption in the strait would raise the price of Brent crude, which is the benchmark for most of the world's oil, including that used in the UK. This would affect petrol prices, heating oil, and the cost of goods and services that rely on transportation.
In terms of natural gas, the UK has become increasingly reliant on imports as domestic production from the North Sea declines. While most of the UK's gas comes from Norway and via pipelines from Europe, the global LNG market influences prices. If Qatari LNG is disrupted, European buyers would compete for alternative supplies, driving up prices across the continent, including in the UK.
Energy security is a growing concern for policymakers. The UK government has been working to diversify energy sources and increase domestic renewable energy capacity, but the transition takes time. In the interim, the country remains exposed to global energy market volatility, and the Strait of Hormuz is a key risk factor.
What Businesses Can Do to Mitigate Risk
Given the potential for price spikes and supply disruptions, UK businesses should consider strategies to manage their energy risk. One approach is to fix energy contracts for longer periods to lock in prices and avoid short-term volatility. Many suppliers offer fixed-rate deals that can provide budget certainty.
Another strategy is to improve energy efficiency to reduce overall consumption. By using less energy, businesses can lower their exposure to price fluctuations. Simple measures such as upgrading to LED lighting, improving insulation, and optimising heating and cooling systems can yield significant savings.
Finally, businesses can explore on-site generation, such as solar panels or combined heat and power (CHP) systems. This reduces reliance on grid electricity and can provide a hedge against rising energy costs. For more insights on managing energy costs, see our article on 5 Insider Tips to Keep Utility Costs Low.