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Risk Involved in Israel-Iran war & importance of Strait of Hormuz

Content

  1. Introduction
  2. Strategic Importance of Strait of Hormuz.
  3. Oil Crisis in history.
  4. Risk involved for Global economy.
  5. Recent ongoing Challenge in Shipping Industry.
  6. Impact of Israel Iran War on Shipping Industry
  7. Conclusion
  1. Introduction

After Israel-Hamas war started in Oct 2023 there has been many changes at global stage. Earlier there was a proxy war going-on with different groups on behalf of them but this Iran directly attacked Israel creating a new equation their relation. Later MSC Aries was seized on 13th April 2024 around Strait of Hormuz. This might have global implication on supply chain and we will discuss the same below.

2. Strategic Importance of Strait of Hormuz.

It’s a narrow strait between Oman and Iran and its width varies from 55 to 95 kilometer, it has island of Qeshm, Hormuz and Hengam. It is the single most important oil passage globally, forming a risk to global oil supply chokepoint for below reasons: –

  1. Passage for 33% of global LNG exports.
  2. Passage for 25% of global oil exports.
  3. Passage of sea route for 7 countries [Iran, Iraq, Kuwait, Bahrain, Qatar, United Arab Emirates & Saudi Arabia (partly)].

Any disruption of this passage may lead to sudden hike in oil price rise and can impact global economy.

Thus, in order to keep this strait safe, USA has its 5th fleet of navy based at Bahrain. This fleet protects US interest in the area.

3. Oil Crisis in history.

Oil Crisis is said to incur when a shortage is created for oil leading to high demand which leads to sudden hike in oil price and is dangerous for economies.

The first Arab oil Embargo was put by Arab countries in retaliation to the support given by western countries to Israel in October 1973 during the Yom Kippur war, there was sudden oil shortage and price hike.

Below is three most important oil crisis faced with price increase:

YearIncidentOil price Increase
1973First Arab Oil Embargo4X
1979Iranian revolution2X
1990Iraq invades Kuwait2X

4. Risk involved for global Economies –

Countries are still struggling to emerge from the impact of Covid-19. Many parts of Europe is still facing inflation of 10% – 12% due to Russia Ukraine war. An increase in energy price will increase the inflation leading monetary policy to keep interest rates high again leading to increase in borrowing by government of both emerging and advanced economies.

5. Recent ongoing Challenge in Shipping Industry:-

Industry is already under stress -due to Houthi rebels attack the Red Sea route has been diverted through Cape of Good Hope. The diversion of each ship costs approximately USD 30 million according to Danish Sultan, managing director of Pac Marine Services in Singapore. It also adds extra 14-21 days to the transit time. The freight for shipment through Cape of Good hope has increased by 3 to 4 times after Nov 23.

6. Impact of Israel Iran War on Shipping Industry –
With the tensions increasing from both the sides it has high probability of choking the shipping routes with below risks involved:

  • Risk of vessel seizure and damage: –
    • Seizure of MSC Aries took place near Strait of Hormuz on 13th April 2024. Few of these instances can change complete shipping route. Globally 80% to 85% of cargo is through sea, thus in any type of situation the vessel movement will take place but these instances can lead to change of route diversion / transit time increase / freight increase / container shortage / less vessel availability etc.
    • Risk of vessel seizure can lead to below impacts: –
      • Seafarers and sailors would not want to board the ships in such a situation and it will lead to a manpower shortage for sailing industry.
      • Ship owners will be diverted towards vessel safety and will work on rescue efforts rather working in decarbonisation which recently picked up a good pace in shipping industry.
  • Risk of Bunker cost increase: –
    • Bunker (oil) cost is one of the major expenditures of shipping industry. Presently the oil cost is around 75$ -80$ / per barrel, but the blockage of Strait of Hormuz will lead to shortage of supply and spike in demand of oil which can increase the freight charges by few times.
  • In case the Strait of Hormuz is choked then: –
    • USA can become net oil exporter.
    • Oil importers will start buying from nearby countries even at higher rates.

7. Conclusion –

Unfortunately, another aspect is to be looked into – This war has led to re-alignment of different global alliances which should be avoided. Thus, it becomes important for global powers to find a peaceful solution to this war like situation.  History can give us more clarity on how these issues can be resolved.


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