The closure of the Strait of Hormuz has emerged as the central flashpoint of the Iran war and the recently signed agreement between Washington and Tehran. Before the war started in late February approximately 25 percent of seaborne oil and 20 percent of global liquified natural gas passed through the strategic waterway. Regardless of the ongoing US-Iran negotiations, the crisis could transform not only the Persian Gulf’s maritime order, but the wider global energy and trade system tied to it.
Iranian strategists, understanding their vulnerabilities against the combined might of a superpower and the Israel Defense Forces, responded with an all-out asymmetrical campaign. The key goal was to maximize domestic and international pressure on Trump to end the conflict. Iran took the unprecedented step of seizing control over the Strait of Hormuz, blocking the flow of oil and gas from the Persian Gulf to global markets. The impact of this de facto closure ignited the largest supply disruption in the history of global oil market, the International Energy Agency warned last March. This strategy apparently did work. Explaining his reasons to stop the war, President Trump stated that he did not want to see economic catastrophe because the world would have begun to run out of oil stockpiles.
The memorandum of understanding (MOU) signed by Washington and Tehran in mid-June confirmed that the safe and free passage will resume almost immediately. This, however, does not mean the pre-conflict navigation system will return. The Iranian government has created the Persian Gulf Strait Authority to establish a new governing system under which all ships have to coordinate with the Iranian authorities. Considering that Tehran has never ratified the United Nations Convention on the High Seas, it does not believe it has to abide by the regulations of free and unimpeded passage through global chokepoints. To avoid any uncertainties, Iranian officials have recently asserted their nation’s right to collect “fees” instead of “tolls.” Iranian diplomats have been discussing with their Omani counterparts a new mechanism to govern the strait. Oman has rejected a tolling system and confirmed that its commitment to international law and freedom of navigation is unwavering. Rather, Muscat is considering the possibility of lawful charges for services rendered in the future to cover environmental mitigation of the waterway, enhanced navigational management including pilotage and security. The other Gulf states (Bahrain, Kuwait, Qatar, Saudi Arabia and the United Arab Emirates) have expressed a strong opposition to any charges.
Since the war started in late February many policymakers and analysts have speculated if the strait will be opened or closed. However, these are not the only two scenarios. More likely there will be episodes of opening and closing the strait. Iran has gained significant leverage not by blocking navigation, but by setting the precedent. For decades Iranian leaders have threatened to control the waterway. They finally made good on these threats when they rightly perceived the joint US-Israeli attacks as an existential threat. Furthermore, the war has demonstrated that interrupting or stopping navigation is much easier and cheaper than ensuring safe crossing.
The experience since late February will likely have long term ramifications on regional and global energy system. First, Gulf states have already developed plans to operate the pipelines that bypass the strait at full capacity. These are the Iranian port Jask and Emirate pipeline Habshan-Fujairah on the Gulf of Oman, the Iraqi Kirkuk-Ceyhan pipeline to the Mediterranean Sea and the Saudi East-West pipeline to the Red Sea. Second, Gulf states are exploring other port and pipeline options such as expanding the Saudi ports on the Red Sea such as Neom, Jeddah and Yanbu and utilizing the Syrian, Turkish and Israeli ports on the Mediterranean Sea to export their oil and gas to Europe. Third, international oil companies are certain to seek to reduce their dependency on the Persian Gulf and expand their investments in other regions such as North Africa, and Latin America. Fourth, the crisis has highlighted the global economy’s heavy dependency on oil and gas and given momentum to the ongoing efforts to diversify the energy mix. In the coming few years there will be more investments in renewable energy, nuclear power and even coal. More people will buy electric and hybrid cars. Equally important, more countries will further encourage energy efficiency and conservation.
The reopening of the Strait of Hormuz is not the end of the story. More likely, a new chapter in the global energy system and world economy is about to be written. The pre-conflict free and unimpeded system is not likely to come back. The new navigation order is still “work in progress” and uncertain. The closure of the strait in 2026 is certain to re-shape the energy equation much more than any other energy shocks.
