Closing the Strait of Hormuz, the global supply chain is at risk of collapse

(Source: VNA) Ships moving in the Strait of Hormuz. Photo: IRNA/VNA

The economic impact of a closure of the Strait of Hormuz would be severe, according to Shahid Hussain, CEO of Green Proposition, a consultancy based in the United Arab Emirates (UAE). Even a minor disruption to the vital Middle East waterway could throw energy markets into turmoil, send inflation soaring and slow global growth.
In the complex web of global trade, few shipping corridors are as vital and vulnerable as the Strait of Hormuz. Located between Iran and the Arabian Peninsula, the narrow 34-kilometer waterway carries nearly a fifth of the world’s daily oil supply and a significant portion of liquefied natural gas (LNG), mainly from the Gulf, to energy-hungry economies in Asia.

The economic impact of a closure of the Strait of Hormuz would be swift and severe. Behind the numbers and market charts is a fundamental truth: the Strait of Hormuz is more than a regional chokepoint. It is the heartbeat of the global energy economy. By 2024, some 20 million barrels of oil and a significant portion of global LNG will be transported daily through the Strait of Hormuz. Economic activity in countries such as China, India, Japan and South Korea, which account for nearly 70% of the crude oil that passes through the strait, is at serious risk. Any disruption would disrupt their energy security and industrial productivity.
Markets have reacted with trepidation even before the threat of a closure has surfaced. In recent months, oil prices have spiked 4-6%, with tanker freight rates rising more than 20% as geopolitical tensions flare in the Gulf. A complete closure of the Strait would be a different matter entirely. Brent crude could spike to $150 a barrel, or even $200 in a worst-case scenario. The same would happen in natural gas markets, especially in Asia and Europe, where LNG imports are heavily dependent and strategic buffers are thin.
Energy price volatility is typically regulated by spare capacity and strategic reserves, but these buffers may no longer be reliable. Unlike previous disruptions, when spare capacity from Saudi Arabia or the release of strategic oil reserves helped stabilize the market, a complete closure of the Strait of Hormuz could put pressure on these buffers. Global spare capacity, already tight due to underinvestment and geopolitics, may not be enough to make up for a 20 million bpd shortfall. The
ripple effects of a spike in energy prices would extend far beyond the oil market. Higher energy costs will spur inflation in the transportation and manufacturing sectors, directly affecting consumers and producers. The International Monetary Fund estimates that a 1% rise in oil prices would raise global inflation by 0.3-0.4 percentage points. With the global economy already prone to inflation, such a spike could push the fragile recovery into a tailspin. Central
banks, caught between fighting inflation and boosting economic growth, would face a difficult policy dilemma. Monetary tightening could return just when many economies had hoped to turn to interest rate cuts. The result could be a return to stagflation, a disastrous combination of slowing growth and rising prices. Low-income households and small businesses will bear the brunt of the consequences, causing job losses, reduced purchasing power and increased inequality in both developed and developing countries.
The Strait of Hormuz also serves as a conduit for petrochemicals, fertilizers, grains and consumer goods. Its closure would disrupt global shipping logistics. Rerouting ships around the Cape of Good Hope could add two weeks to delivery times, straining port infrastructure and pushing up freight rates and insurance premiums. Industries that rely on “just-in-time” manufacturing, such as auto and electronics manufacturing, could face massive delays and skyrocketing costs.
The global food system would not be immune. Disruptions to fertilizer and grain shipments through the strait would increase the cost of agricultural inputs, while rising fuel prices would increase logistics costs. Food prices, already vulnerable to climate change and conflict, will continue to rise, exacerbating instability in import-dependent countries.
Saudi Arabia’s East-West pipeline can carry about 5 million barrels a day, expandable to 7 million. The UAE’s Fujairah pipeline adds another 1.5 million barrels a day. These totals are still significantly lower than the 20 million barrels a day capacity of the Strait of Hormuz. Major oil exporters such as Iraq, Qatar and Kuwait lack any alternatives.
Strategic Petroleum Reserves (SPRs) provide only short-term relief. The US holds about 600 million barrels, Europe 400 million barrels and Asia over a billion barrels. But these are finite resources. With an estimated loss of 20 million barrels per day, even global strategic oil reserves could be depleted within two months. In a prolonged Strait of Hormuz closure scenario, even the most well-prepared economies would begin to struggle.
Governments, multilateral institutions, and private sector stakeholders need to start treating energy chokepoints as systemic risks. This means increasing investment in redundancy, whether through diversified supply chains, strategic energy corridors, or alternative fuels. It also means improving diplomatic mechanisms to ensure uninterrupted maritime security in vital routes like the Strait of Hormuz. In a world increasingly interconnected by trade, a narrow waterway has a disproportionate impact on global economic stability. Closing this route, even temporarily, would not only raise prices but could reshape the trajectory of global growth for years to come.