What is the Strait of Hormuz? How will its closure affect oil prices?

The US-Israeli attack on Iran has led to swift retaliation from Tehran, targeting its assets in many countries in the Middle East, including Israel, Qatar, the United Arab Emirates, Kuwait, Bahrain, Jordan, Saudi Arabia, Iraq and Oman.

Analysts are warning of a rise in global oil prices after Iranian officials have spoken of closing the Strait of Hormuz, one of the world’s most important sea lanes.

On Saturday, an official from the European Union told Reuters news agency that ships crossing the strait were receiving high frequency (VHF) transmissions from Iran’s Islamic Revolutionary Guard Corps (IRGC), saying “no ship is allowed beyond the Strait of Hormuz”.

However, the EU official added, Iran has not officially closed the strait. Instead, several tanker owners have suspended oil and gas shipments through the strait amid ongoing disputes in the region.

“Our ships will stay for several days,” a senior official at the main trading desk told Reuters on condition of anonymity. Countries like Greece have also warned their ships not to travel through the waterway.

Any disturbance in this important maritime route could affect the economic stability of the world.

So what is the Strait of Hormuz, and how will its closure affect oil prices?

Where is the Strait of Hormuz?

The Strait of Hormuz is between Oman and the UAE on one side and Iran on the other. It connects the Arabian/Persian Gulf, or simply the Gulf, with the Gulf of Oman and the Arabian Sea beyond.

It is 33km (21 miles) wide at the narrowest point, with a navigation channel only 3km (2 miles) wide in either direction, making it vulnerable to attack.

Despite its size, this port carries the world’s largest cargo. Major oil and gas exporters in the Middle East rely on it to deliver goods to global markets, while importing countries depend on its uninterrupted operation.

How much oil and gas passes through the strait?

According to the US Energy Information Administration (EIA), approximately 20 million barrels of oil, worth $500 billion in global energy trade, would pass through the Strait of Hormuz every day in 2024.

Crude oil passing through this valley comes from Iran, Iraq, Kuwait, Qatar, Saudi Arabia and the UAE.

The strait also plays an important role in trading natural gas (LNG). According to the EIA, by 2024, approximately one-fifth of global LNG shipments will pass through the corridor, with Qatar accounting for most of those volumes.

Where does it all go?

The strait handles both oil and gas imports and exports.

Kuwait and the UAE’s imports from the Gulf include imports from the United States and West Africa.

The EIA estimates that by 2024, 84 percent of crude oil and condensate will be shipped via transit to Asian markets. A similar pattern is seen in gas trade, with 83 percent of LNG volumes moving through the Strait of Hormuz to Asia.

China, India, Japan and South Korea combined for 69 percent of the consumption of crude oil and condensate flowing through the strait last year. Their factories, transportation networks and power grids depend on the uninterrupted flow of Gulf energy.

Rising oil prices will affect countries like China, India and several other Southeast Asian countries.

How would the closure of the Straits affect oil prices?

According to Iranian media, the country’s Supreme National Security Council must make the final decision to close the strait, and it must be approved by the government.

But energy traders have been cautious in recent weeks amid rising tensions in the region – home to one of the world’s largest oil and gas reserves. Muyu Xu, a senior crude oil analyst at Kpler, told Al Jazeera that since the war began on Saturday, there has been a sharp decline in ship traffic through the channel.

“At the same time, the number of ships sinking in both directions – in the Gulf of Oman and the Gulf – has increased, as ship owners are increasingly concerned about the security risk at sea following Tehran’s warning of a ban on navigation,” he said.

“The Strait of Hormuz is important for the global energy market, as 30 percent of the world’s crude oil travels through waterways. In addition, about 20 percent of the world’s jet fuel and 16 percent of gasoline and naphtha flows also pass through the Strait,” said Muyu.

“On Sunday, an oil tanker was hit off the coast of Oman a few hours ago, indicating a clear increase in conflict and a shift in focus from military positions to power.”

Shipping reports indicate that at least 150 tankers, including oil and liquefied gas tankers, have sunk into the open Gulf waters across the Strait of Hormuz.

Tankers have gathered in open waters off the coast of major Gulf oil producers, including Iraq and Saudi Arabia, as well as LNG giant Qatar, according to Reuters news agency estimates based on ship tracking data from the MarineTraffic platform.

Also, on Sunday, the United Kingdom Maritime Trade Operations (UKMTO) said it was aware of “significant military activity” in the Strait and said it had received a report of an incident two nautical miles north of Oman’s Kumzar, located in the Strait of Hormuz.

The person from Kpler said that a large amount of electricity is in danger. “This is expected to increase the price of oil significantly and may cause prices to rise for a longer period of time, probably longer than during the conflict last June.”

Ali Vaez, director of the Iran program of the International Crisis Group, told Al Jazeera, “The closure of the Strait of Hormuz will affect a fifth of the world’s oil trade overnight – and prices would not only rise, they would rise violently and only through fear.”

“The shock would reverberate beyond energy markets, tightening monetary conditions, increasing inflation, and pushing the fragile economy closer to recession for weeks,” he added.

When the US and Israel bombed Iran last June, there was no direct impact on naval operations in the region.

What does it mean for the economy?

Any disruption to energy flows through Hormuz will also affect the global economy, driving up oil and factory prices.

Mr. Hamad Hussain, an expert in climate and economics at the United Kingdom company called Capital Economics, said that for the national economy, the rise in oil prices increases the rise in prices.

“If crude oil prices were to rise to $100 per barrel and remain at these levels for some time, that could add 0.6-0.7 percent to global inflation,” he said, noting that this would also lead to an increase in gas prices.

“This could reduce the liquidity of central banks, especially in emerging markets, where policymakers tend to focus on volatility in commodity prices,” he added.