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How Likely is a Blockade of the Strait of Hormuz?

The more and more explicit nuclear rhetoric and the threats of a blockade of the Strait of Hormuz may soon cause the conflict to escalate. We described two years ago what the temporary shutdown of this neuralgic location of global energy trade would entail. The Strait of Hormuz connects the Persian Gulf in the West with the Gulf of Oman and the Indian Ocean in the East. The strait is about 180km long and, at its narrowest point, only 55km wide. Almost 35% of the oil shipped by sea and 20% of global oil production is transported through this maritime eye of a needle on a daily basis.

Production and exports at the Persian Gulf
Production and Exports in the Persian Gulf
Sources: IEA, Bloomberg, Datastream, Erste Group Research

A blockade would come with dramatic short-term consequences. China would be particularly hard hit. More than 40% of the Chinese oil imports pass through the Strait of Hormuz. This means that Iranian oil is more important to China than Saudi Arabian oil is to the US.

When comparing the military capacities, we do not believe that Iran is able to block the strait for an extensive period of time. According to the Economist Intelligence Unit, Iran may have a large (about 520,000 soldiers), but outdated army. The military budget amounts to about USD 13bn (by comparison, the US defence budget is USD 554bn). According to International Institute of Strategic Studies the Iranian Navy, which is based at the estuary of the Strait of Hormuz, is currently about 190,000 men strong. It owns many small and manoeuvrable torpedo boats and patrol boats. The strait does not favour large war ships by definition, in the New York Times a US military official has called a military confrontation in that region a “knife fight in a telephone booth”. The biggest threat on the Iranian side is probably posed by the three highly advanced submarines of Russian design, which can deploy sea mines. At the moment Iran owns about 2,000 sea mines and a fleet of mini-submarines of its own production.

By comparison, the US clout is enormous. The Fifth Fleet is based in Bahrain and usually comes with 1-2 aircraft carriers, 6 cruisers, and 7 destroyers. Capacities are being expanded as we speak. In addition, the UK has dispatched the HMS Daring, one of the world’s most modern anti-air warfare destroyers. The Iranian air force would probably have a hard time trying to defend itself in this uphill battle.

Even if Iran managed to maintain a blockade for only a short while, the consequences would be dramatic. The oil price would definitely set new all-time-highs and might reach USD 200. The long-term effects are difficult to assess. Iran would retaliate and probably attack the pipeline infrastructure as part of their guerrilla tactics, and generally try to destabilise the region. This would also come with a huge impact on the freight industry in the region, because sea shipments could hardly be insured any longer.

We regard doomsday scenarios as exaggerated given that the oil reserves of almost 1.5bn barrels (1.27bn of which crude) could offset supply outage for a couple of weeks. On top of that, Saudi Arabia is slightly more flexible with regard to its export routes. Three pipelines go to Yabu at the Red Sea, with a capacity of 4.5mn barrels/day. In addition the UAE is planning to complete a pipeline with a capacity of 1.5mn barrels/day from Abu Dhabi to the Gulf of Oman by summer. The pipelines would definitely mitigate the effects on the oil market, but not fully neutralise them.

Cui bono?

Iran would score an own goal with a blockade. The fact that all important tanker terminals are located on the side of the Persian Gulf means that a blockade of the strait would affect the Iranian oil exports just as much. Iran is hugely dependent on the oil sector. The sale of oil accounts for more than 60% of tax revenue and 80% of export revenue. Due to the lack in refinery capacity Iran also has to import the majority of its petrol and heating oil.

Although the first thing that comes to mind in connection with a possible blockade is the shortfall in oil, we believe that the impact on the LNG market would be substantially more severe. Qatar is by far the biggest producer of LNG with a market share of 25%. But in contrast to oil, there is no way of avoiding the Strait of Hormuz for LNG. This means that more than a quarter (Qatar and UAE) of global LNG capacity would be affected.

Breakdown of LNG producers in terms of total production 
Breakdown of LNG Producers
Sources: BP Statistical Review of Energy 2011, Erste Group Research

The majority of exports of liquefied natural gas cross the Persian Gulf on its way to Asia. Japan, India, and Korea are the most important buyers. Consequentially these countries would be hit on both ends by a blockade – on one hand by a decrease in LNG deliveries, on the other hand by the drastically rising oil price. Japan would be particularly hard hit, having switched largely to gas after the Fukushima disaster. Also, Japan is one of the last industrialised countries to still use high quantities of oil in its power production. Japan would probably have to ration energy if the supply chain of oil or LNG were to be disrupted .

LNG deliveries from Qatar and UAE 
LNG Deliveries from Qatar and the UAE
Sources: BP Statistical Review of Energy 2011, ERSTE Group Research

By. Ronald Stoeferle of Erste Group

Erste Group is the leading financial provider in the Eastern EU. More than 50,000 employees serve 17.4 million clients in 3,200 branches in 8 countries (Austria, Czech Republic, Slovakia, Romania, Hungary, Croatia, Serbia, Ukraine). As of 31 December 2010 Erste Group has reached EUR 205.9 billion in total assets, a net profit of EUR 1,015.4 million and cost-income-ratio of 48.9%.

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  • Philip Andrews on March 21 2012 said:
    It makes no sense to imagine that Iran will try to blockade the Straits. There are a number of ways that Iran can cause sufficient disruption without actually blockading.

    That incident some time back when a tanker was reportedly hit by a missdile that 'failed to explode'. The missile left a dent in the tankers side, and a much larger dent in Western perceptions of Straits security...

    In fact all it takes is for an Ayatollah to sneeze at the Straits and the price of oil will go through the roof. Iran doesn't need and in fact never actually utilizes her conventional armed forces for this kind of 'psycholgical warfare'.

    I'm sure the Iranians, after having watched the armies of the West in action in Iraq and Afghanistan at very close quarters over the last 10 years, are very aware of the limitations of their conventional forces against those of the west.

    But conversely they are also aware in almost intimate detail of the limitations of Western military capabilities. For instance they are well aware that America can project destructive force but cannot project power...

    By contrast Iran is very capable of power projection and of pulling rabbits out of a hat;
    the Pasdaran developed IEds in Iraq that could punch a hole through Abrams tank armour,
    launching satellites,
    taking over electronic control of American UAVs, supplying MANPADS to Hezbollah that effectively curtailed IAF activities over Lebanon,
    supplying radar to Syria that prevents a surprise attack by Israel,
    taking over Iraq so that Iraqi oil will be under Iranian control eventually making Iran/Iraq oil potential second only to Saudi...

    Iran has many options and is surprisingly watertight with information. The west is reduced to 'best guessing' most of te time. Now that Iran has most of its nuclear facilities deep underground even beyond (effective) reach of 'bunker busters' the West really does have to consider its options more carefully esp viz a vis the Straits...
  • Stephen E Hughes on March 21 2012 said:
    "Iran to block the Strait would ultimately create greater economic strife within the already-embattled Republic; an estimated $73 billion in annual revenue comes from oil sales, making up 50 percent of the national budget and 80 percent of Iran’s exports. With a large portion passing through the Strait of Hormuz, the closure of the strait would cause just as significant, if not more, damage to the Islamic Republic than to the global oil markets and is likely to foment greater domestic unrest and shake the already weak Iranian economy,". Jan 2012 CSIS ,Iran's Defense Posture: Not So Dire Straits

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