Importance of Strait of Hormuz & how it can choke the global economy?

Strait of Hormuz is been in the news for a lot of time. Today we are going to talk about why Strait of Hormuz is so strategically important and how it can choke the global economy. As the former Prime Minister of Iran calls it the jugular of the global economy. Importance of Strait of Hormuz to keep the world out of recession.

To under it easily we need to know what exactly is strait?

What is Strait?

Strait is a narrow passage of water that connects larger areas of water. Or to be clear we can say that Strait is a narrow passage between the landmass that is leading to larger areas of water or sea.

As we understand the meaning of Strait now it is important to know the location of Strait of Hormuz and why it is so Important.

Location of Strait of Hormuz

Strait Of Hormuz
Strait of Hormuz

As the image shows Strait of Hormuz is lies between Iran and Oman in Middle East Asian countries. Strait of Hormuz is a passway from the Persian Gulf to the Arabian Sea. As we all know middle eastern countries are blessed with High oil reserves and produces and export the same around the world. From the narrowest point, the strait is 33.8 Km wide.

So the oil tankers from the middle eastern countries have to pass through Strait of Hormuz to export their oil and petrochemical products around the world. In short Strait of Hormuz is a pathway of more than 20% of the global oil export. “In 2018 its daily oil flow averaged 21 million barrels oil per day. Now you’ll be able to understand the importance of Strait of Hormuz.

To put it into perspective that’s about 3.33 billion liters of oil or 882 million gallons of oil per day pass through the Strait of Hormuz that’s roughly 40% of global seaborne oil exports.

Tensions between the US and Iran

Tensions between Iran and the US escalating nowadays after the US withdraws from the Iran nuclear deal and put economic sanctions on Iran through CAATSA (Countering Americas’s Adversaries through Sanctions Atc) from which the world can not buy oil and other products from Iran which is causing Iran’s economy and leading to high inflation, high unemployment rate and shrinking of Iran’s economy.

oil tanker

Iran Revolutionary guard ceases British Stena Impero oil tanker and took it to an Iranian Port. After that Iranian vessels tried to block and attack several oil tankers.

As Iran economy depends on its oil export to support their economy they threaten the US by blocking the Strait of Hormuz by their Naval assets and choking the 20% of the global oil exports if the US didn’t lift the sanctions from Iran to export their oil. US said blocking of Strait will lead to direct war between the US and Iran. After that tensions between the US and Iran reaches its boiling point with tensions of levels not seen since the tanker war.

Reasons for Tensions between the US and Iran.

Nuclear attack

For decades Iran was developing its nuclear program to make weapons of mass destruction (Nuclear bombs). To retaliate the US put sanctions on Iran targeting petroleum products. But in 2015 Former President Barack Obama signed Nuclear deal with Iran that prevents Iran from obtaining a nuclear weapon. Iran allows its nuclear facilities to be monitored in exchange of sanctions lifted. But in 2018 President Donal Trump abandon the nuclear deal with Iran and put sanctions back in place. Iran also threatens if the world didn’t start to trade with Iran they will start mining Uranium (used in making nuclear weapons).

President Trump claims the didn’t go far enough in addressing Iran’s terrorist proxy group throughout the middle east like Hezbollah and Houthi rebels in Yemen. And also claim Iran is making long-range Nuclear ballistic missile.

Possibility of War?

American Navy

Possibility of Iran and the US going for a full-fledged war is high according to the experts because the US is building military build-up around Iran. As 5th fleet of the US is already deployed in Bahrain and the mega aircraft carrier USS Abraham Lincoln is near Iran to build pressure on Iran.

A US surveillance Drone was also shot down by Iran claiming it was on Iran territory but the US refused and said it was flying over international waters (International air space). America retaliated through cyberattacks disabling IRGC computer to control rockets and missile.

How Iran can escalate the war?

Iran is reacting very aggressively after the US withdraws from the nuclear deal and put the sanctions back in place and blocks its exports as no country can not trade with Iran due to Americas’s sanctions.

So Iran wants to use only leverage they had now to keep threatening the world that they will block the Strait of Hormuz if they didn’t start trading with them and they are putting pressure on the US and other countries by disrupting oil tankers and escalating tensions.

If the sanctions remain for a longer time of period. The possibility is Iran can actually block the Strait which will escalate a direct war between the US and Iran. Iran has a good amount of NAVY assets including Submarines, Frigates, Corvettes, Missile craft.

And they can even use naval mine which can harm oil tankers and America’s navy ships near Strait, And they also have missile defenses stationed on Iran land near Strait of Hormuz which can completely choke the Strait of Hormuz or the jugular of the global economy.

Impact on the global economy if war broke out between America & Iran?

Source: Google

Impacts of war between the US & Iran at Strait of Hormuz will lead to blocking the supply of oil through Strait of Hormuz which will impact the prices of oil everywhere in the world. Because oil is a globally traded product and oil prices are based on supply and demand for oil. Less supply will lead to increased oil prices.

Many Countries will also see a shortage of oil because they are dependent on oil imports from Middle Eastern countries and they have to ask other suppliers for oil which is a time taking process.

Shortage of oil in a country can cause a lot of harm to the countries economy. Shortage of oil can lead to shortening of supplies of everything like vegetables, fruits, medicines, cosmetic, etc. Because of shortage of oil truckers will not be able to supply goods from one place to another. Which will hit the day to day products supply to the markets which can lead to a black market of products and people may have to pay more prices. No public transportation no busses to transport from one place to another. Inflation will increase due to all of this. Every product will become more expensive for the customer to buy.

Expensive oil will lead to more dollars moving outward to buy which will cause more outflow of foreign exchange which can create a short time foreign exchange crisis in many countries. Currency may get depreciated because of this and imports will get expensive for the country. It can lead to the bankruptcy of many countries.

Crime rate may increase because of all this and political instability can be seen in many countries. It may be time for the world to think about less dependence on oil and invest in other cleaner energy alternatives aggressively. But for now, we are dependent on oil and oil will remain the lifeblood of the World’s Economy for the coming decades.

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