‘Their new nuclear option’: Why Iran’s influence over the Strait of Hormuz is here to stay

London —  

Iran has gained a new source of leverage over the global economy, and it’s not about to give it up.

Tehran has shown that it is able to effectively blockade the world’s most important oil chokepoint, with relatively few missiles and drones. Its influence over the Strait of Hormuz will long outlast the conflict itself, according to multiple analysts who spoke to CNN, regardless of what it eventually agrees to with the White House.

The latest exchange of strikes between the United States and Iran suggests that a deal may yet be some way off. But even if it comes, experts say it’s unlikely to strip Iran of its newfound energy weapon.

That has significant implications for the global economy, which is already reeling from a historic energy shock. Before the war, the world received, about a fifth of its oil and liquefied natural gas (LNG) supply via the now-heavily contested waterway.

Efforts to diversify away from the strait – and the Middle East – will likely improve energy security, but at a cost. Beyond energy, lingering uncertainty regarding the security of the strait will affect other goods, ranging from fertilizer and jet fuel to helium and aluminum.

“What Iran has demonstrated is that it has the power to close the strait and to keep it closed, even in the face of immense US and Israeli bombardment,” said Gregory Brew, a senior analyst at Eurasia Group, a political risk consultancy. “And that is something that no one will ever be able to take away from them,” he added.

“It is their new nuclear option.”

A Hormuz toll?

Several analysts argue that an open Strait of Hormuz, even one partly controlled by Iran, would inflict less damage on the global economy than one that is closed.

Kpler, a trade intelligence firm, wrote a paper in April on how a strait managed by Iran, in conjunction with Oman, could work in practice. These UK-based academics argued along similar lines. In other words, the idea, however alarming, has entered mainstream discourse.

Iran, for its part, has moved to formalize its control over the strait in direct opposition to US demands. Last month, it established the Persian Gulf Strait Authority (PGSA) to oversee a new protocol for transits, which includes vetting by Iranian authorities and, in some cases, fees.

The US, meanwhile, has since sanctioned the PGSA and prohibited shipping companies from striking deals with Tehran to secure safe passage through the strait. The White House has also threatened secondary sanctions against companies that pay fees to Iran.

On the other hand, if the Strait of Hormuz remains closed through the end of the year, prices for Brent crude, the global oil benchmark, could approach $200 a barrel, transforming the energy shock “into a global economic crisis,” added Wood Mackenzie’s head of economics, Peter Martin.

Oil prices will reflect increased risk

A Hormuz toll would be a lot less costly, at least for oil prices, if it meant that tanker transits returned to their pre-war level of around 140 vessels a day, according to Gelder.

He estimated that a transit fee of $2 million per tanker, the price Tehran charged at least one vessel, according to shipping intelligence firm Lloyd’s List, would add only around $1 to a barrel of oil.

“The concern with any management (of the strait), is the degree to which that restricts flows,” Gelder cautioned, however, questioning how Tehran would manage the logistics of overseeing 140 tanker transits a day.

Energy consultancy Rystad, meanwhile, believes a $1-2 per barrel premium on oil prices is a conservative estimate. “We are talking a geopolitical risk premium of $10-20 per barrel,” Jorge Leon, Rystad’s head of geopolitical analysis told CNN.

“We are convinced that Iran will maintain some sort of leverage over the Strait of Hormuz going forward,” in which case, “the risk of further disruption in the strait… is real,” he added.

“We’re not going back to oil prices at $60 a barrel,” where they were at the start of the year, “not even in 2027.”

Alternatives to the strait

Whether or not Iran institutionalizes its control over the strait, doubts about the long-term security of the waterway will remain. Such concerns have already spurred the Gulf’s major oil producers to utilize and invest in alternative export routes.

Saudi Arabia and the United Arab Emirates have redirected oil exports via the East-West and Habshan-Fujairah pipelines respectively. The UAE is already working on a second pipeline to bypass the strait.

But for other countries in the region, alternatives to the strait are less politically and commercially viable. Kuwait, Qatar and Bahrain, for example, would need to pipe exports through either Saudi Arabia or Iraq.

Building pipelines means “major infrastructure projects, often across borders, which means they are costly, complicated and not quick,” said Gelder of Wood Mackenzie.

For Qatar, which exports around a fifth of global LNG supply, a Hormuz workaround would entail not only building an expensive pipeline infrastructure but also investing in liquefaction facilities at ports to turn pipeline gas into LNG to be shipped around the world.

New energy infrastructure would not be immune to Iranian attack either, as the experience of the war demonstrates. Pipelines “would be within range of Iranian missiles and drones,” said Brew of Eurasia Group.

Energy security in focus

The war’s disruption to the Strait of Hormuz has sharpened focus on energy security around the world and comes on the heels of the energy crisis sparked by Russia’s 2022 invasion of Ukraine.

Efforts to diversify energy supply chains away from the Gulf are already underway and will boost investment into other oil-producing regions, such as Latin America, as well as into electrification and renewables.

Still, the oil-rich Middle East will remain critical to meeting the world’s energy needs for some time yet, making Iran’s new energy weapon all the more potent.

“The global economy… is going to have to acknowledge that reality,” Brew told CNN. “It is of colossal significance… it suggests that, ultimately, the security of Hormuz and the Persian Gulf will depend largely on the actions and decisions undertaken by Iran.”