How the Strait of Hormuz Disruption Affects Global Economics

Introduction

It is well known that the U.S. has been active in international conflict, allied with Israel, but their involvement may have unfortunate consequences for the global economy. After military strikes on their infrastructure, Iran has closed down the Strait of Hormuz, forming the Persian Gulf Strait Authority to restrict passage into this critical waterway of trade. So what does this mean for the rest of the world?

The Strait's Global Impact

The Strait is located south of Iran and handles about one quarter of global seaborne oil trade and a large part of liquefied natural gas flows and fertilizers. Since February, the closure of the Strait has had global impacts, as trade has reduced significantly. Bahrain, Iran, Iraq, Kuwait, Qatar, Saudi Arabia and the United Arab Emirates are Strait of Hormuz dependent economies, as well as major global suppliers of important fertilizer, energy, and industrial products. Following the disruption, exports from these countries declined 21% in value. Export volumes declined 54%, with liquified natural gas recording the steepest contraction of 95%. The UN noted that the largest losses were energy products, such as crude petroleum oil exports. The fall of exports from fertilizers, chemicals, plastics, and aluminum show the scale of the Strait’s closure and its effects on a broad range of industries and supply chains.

The reduction of exports in the Strait of Hormuz shows a shortage in oil supply, which can have negative effects on the world market. Importers of oil will have to pay more for fuel, which can lead to domestic costs increasing such as transportation and heating. For example, Japan sources 91% of its crude petroleum oil from Hormuz-dependent countries, and as a result of the conflict, they have recorded a 64% decline in total imports.

Another option is to find alternative suppliers of such products, as Thailand has done. While alternative suppliers are increasing shipments to try and counteract the Strait of Hormuz disruption, they have struggled to offset the lack of exports.

Many expect worldwide inflation, as the cost of oil, natural gas, and electricity is to become more expensive due to the reduced supply. Businesses face higher costs, and will be forced to inflict them onto consumers.

Finally, there is the risk of global recession. When the aforementioned products become more expensive, there is less available money that businesses can use to invest. At the same time, consumers have less money to use to buy goods and services. Additionally, because the value of exports has also decreased, governments can receive less revenue, and industries connected to exports can suffer. All of this put together can slow economic growth, and can even risk a global recession.

The important takeaway is that the Strait of Hormuz closing not only affects countries in the region, but the global market as a whole. Therefore, it is important and expected that countries have undergone negotiations with Iran to try and reopen the trade route.