What Happens if Iran Does Close the Strait of Hormuz? $440 Oil?

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As Iran continues its tough talk about US-led sanctions against the country’s oil and banks, the Islamic Republic’s threatened closure of the Strait of Hormuz remains the most potent weapon in the country’s arsenal. Should Iran manage to close the Strait, the impacts on both the world’s crude oil market and on Iran itself could be profound.

Last week an article in the International Business Times tried to get a handle on what the impact would be if Iran does close the 21-mile wide thoroughfare. The story includes some bewildering data, but the main comparison is pretty clear: during the 1970’s oil embargo, the cost of a barrel of oil quadrupled (from $3/barrel to $12/barrel!), and if Iran succeeds in closing the Strait, a barrel of oil could easily quadruple this time, from around $110/barrel to $440/barrel.

Anything’s possible, but this outcome seems unlikely. Not because the amount of oil lost would be insignificant, but because closing the Strait would cause severe pain in Iran and its neighboring countries as well as in the US and its allied countries.

Militarily, though, Iran could close the Strait. For a wide ranging look at possible military scenarios and outcomes, see this article at the Oil Drum blog. Just one quote from the article negates the idea that the US/NATO could quickly use military force to re-open the Strait:

[T]he few weapons known for certain to be owned by Iran, like the Moskit missile, the S-300 air defence system or the J-10 jet fighter are enough to discredit any idea of immediate superiority by NATO over Iran.

About 17 million barrels/day of crude pass through the Strait, nearly 40% of the world’s seaborne crude supply. That’s a little less than 20% of the total crude market of about 90 million barrels/day. Crude from Iraq, Kuwait, Bahrain, Qatar, the United Arab Emirates, and Saudi Arabia, as well as Iran, passes through the Strait. The Saudis also have a Red Sea export facility, but the majority of Saudi exports passes through the Strait.

In 2011, the US imported about 9.2 million barrels/day of crude oil from all sources, according to the US Energy Information Administration. Of that, about 18% of US imports — 1.7 million barrels/day — came from countries bordering the Persian Gulf, including more than 1 million barrels/day from Saudi Arabia.

The impact on the US and its allies would not come from the loss of the barrels, but from rapidly rising prices, as the IBT article accurately notes. In the embargo of the 1970s, the world lost about 7% of its supply. The percentage loss today would be more than double that.

The embargo in 1973-74 lasted about seven months. If Iran could succeed in closing the Strait for an equal length of time today, crude oil prices might quadruple over time. It’s not unlikely that prices would nearly double at once, and then continue to rise as the closure lengthens. Any military action by the US/NATO side would almost certainly send the price up faster.

Paul Ausick