The potential closure of the Strait of Hormuz threatens to unleash an unprecedented oil supply shock with devastating economic costs globally. The Iranian parliament’s recent vote to consider shutting down this vital channel, which facilitates the transit of a fifth of the world’s oil consumption, in retaliation for a US attack, could trigger a severe disruption to energy markets. The International Monetary Fund’s chief, Kristalina Georgieva, has warned that US strikes on Iran could inflict significant damage on global growth.
A full or partial closure of the strait would inevitably lead to a dramatic increase in energy prices, heightened inflationary pressures, and a significant slowdown in global economic activity. 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.