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Here’s why the Strait of Hormuz is the world’s most important oil chokepoint

The Strait of Hormuz is a critical gateway to the world’s oil industry, with more than a fifth of global oil supply flowing through a narrow sea channel used by Gulf countries like Iran, Saudi Arabia and the United Arab Emirates.

The strategically important waterway links crude producers in the Middle East with key markets across the world.

Daily oil flow in the Strait averaged 21 million barrels per day in 2018, according to the U.S. Energy Information Administration (EIA). That’s the equivalent of about 21% of global petroleum liquids consumption — making it the world’s most important oil chokepoint.

The EIA defines a chokepoint as a narrow channel along widely used global sea routes that are critical to energy security.

Therefore, the inability of oil to transit a major chokepoint, even temporarily, can lead to substantial supply delays and higher shipping costs — resulting in higher world energy prices.

Most chokepoints can be circumvented by using other shipping channels but some, such as the Strait of Hormuz, have no practical alternatives.

Flows through the narrow channel in 2018 made up about one-third of total global seaborne traded oil. More than one-quarter of global liquefied natural gas trade (LNG) also transited the shipping channel last year.

US-Iran tensions
The Gulf region has been shaken by a period of heightened instability in recent months, threatening the flow of oil through the Strait. Six oil tankers and a U.S. spy drone have been attacked since May in, or near, the waterway amid intensifying tensions between the U.S. and Iran.

The attacks brought the two countries close to conflict last month. President Donald Trump called off air strikes at the last minute in retaliation for Iran shooting down a U.S. drone over the Gulf, which followed attacks on two oil product tankers in the nearby Gulf of Oman by unidentified assailants.

Washington has also blamed Iran for the attacks on four oil tankers in the same area on May 12. Tehran has denied the allegations.

Over the past 12 months, the Trump administration has imposed new sanctions on Iran, as part of a sustained attempt to strangle the country’s economy over its nuclear program. Some of the financial restrictions specifically target Iran’s oil exports — long seen as the economic lifeblood of the Islamic Republic.

In response, Tehran said earlier this month that it would start enriching uranium at higher levels, breaching an international accord.

Iran has also threatened to disrupt oil shipments through the Strait of Hormuz.

If tensions continue to escalate, disruptions along the waterway — which is just 21 miles wide at its narrowest point — could send shockwaves to India, China and dozens of other countries that import Middle Eastern crude oil in large quantities.

Which countries depend on oil shipped via the Strait?
The EIA estimated that 76% of the crude oil and condensate that moved through the chokepoint went to Asian markets in 2018.

China, India, Japan, South Korea, and Singapore were the largest destinations for crude oil moving through the Strait of Hormuz to Asia, accounting for 65% of all Hormuz crude oil and condensate flows last year, the EIA said.

Meanwhile, a shale-drilling boom in the U.S. has caused the production of oil and gas in the U.S. to skyrocket, making the world’s largest economy significantly less dependent on imports from Persian Gulf countries.

U.S. imports from Middle Eastern countries averaged less than 1.05 million barrels per day in March, down from a peak of almost 3.08 million b/d in April 2003, according to the EIA.

Over the same period, oil output in the U.S. climbed to almost 12 million barrels per day, up from 5.73 million b/d.

A surge in oil and gas output in the U.S. has also changed the dynamics of the world’s oil market, which has typically taken cues from OPEC — a Middle East-dominated producer group that includes Saudi Arabia, Iran and Venezuela.
Source: CNBC

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