The World’s (Currently) Most Critical Chokepoint
We’ve been hearing about supply chain issues since COVID-19 forced much of the world indoors for approximately two years.
Even after the pandemic ended, these issues persisted around the world. Shifts in labour availability combined with a spike in demand for goods where supply has not able to keep up is leading to empty shelves in the supermarket, and higher prices at the petrol pump. This hasn’t been helped by the geopolitical strains faced in eastern Europe and the Middle East, either. While they’ve largely settled now, food prices soared in the initial aftermath of the invasion of Ukraine due to chaos in the Black Sea and Europe’s most agriculturally productive area.
The Strait of Hormuz at the end of the Persian Gulf. Source: Business Insider
The other critical area for international supply lines - specifically fossil fuels - currently looks increasingly unstable.
The Strait of Hormuz is, on average, only about 35 miles wide. It sits at the end of the Persian Gulf, a waterway stretching from Kuwait, past Bahrain, Qatar, the UAE, and Oman before entering the Arabian Sea. Most importantly, however, the entire Gulf - Strait of Hormuz included - runs along the entire southern edge of Iran.
The Gulf states - which get their moniker from the Persian Gulf - are wealthy in two things: oil, and finances generated from the sales of oil. In fact, six* out of the top 20 exporters of oil directly border the Gulf, with the seventh (Oman) just behind in 21st. Each day, the Strait of Hormuz exports an astonishing USD $1.2 billion worth of oil per day - an amount which the American Energy Information Administration estimates equated to approximately one-fifth of all global liquid petroleum consumption (of which oil is merely a component).
But if this area has been the backbone of international oil trade for years, why is it only now coming into the spotlight?
Tensions in the Middle East, at the time of writing this article, are extraordinarily high. The aftermath of the October 7th attacks in Israel have undone years of diplomacy as militia groups in Palestine, Yemen, and southern Lebanon have become more active and violent than at any point in the past decade. These groups do not share geography, but they do share backing from Iran - the country with the longest coastline along the Persian Gulf.
If a major conflict breaks out in the Middle East - which currently seems well within possibility - an Iranian blockade of the Strait of Hormuz will cause oil prices to skyrocket.
Russian oil export revenues have fallen since the implementation of sanctions - but could be revived if prices spike. Source: Center for Research on Energy and Clean Air
A spike in oil prices will, of course, not affect only the Middle East - though the impact will certainly be felt there. The knock-on implications will be truly global. Higher oil prices will certainly benefit the Russian economy, which has already generated nearly USD $800 billion after becoming the most heavily sanctioned country in the world after invading Ukraine. Higher oil prices will only cause that figure to grow higher, faster - placing even greater strains on the current situation in Ukraine. The spike in oil prices will also be felt in India and China, which imported 40% and 75% of their fossil fuel supplies in 2022, respectively. Although great efforts towards better renewable energy production are being taken in both India and China, the transition in either country is far from complete and a reliance on fossil fuels remains the norm.
Thus, while the COVID-19 pandemic may seem like a distant memory, we may not be out of the woods regarding supply chain issues yet - and the worst may be yet to come. This is, of course, only looking at a crucial, but single, shipping lane as well - the human, environmental, and infrastructure cost of a major conflict across the Middle East is barely calculable - and almost unimaginable.
TAI Score: Degree 5. All eyes are currently on Iranian proxies and how the situation in the Middle East will unfold. The current risk to the international economy - let alone local human security in the region - is extraordinary. If they are not already implemented, decision makers and business leaders must have a plan for adapting to the possibility of severe conflict as soon as possible. Leading news outlets are referring to the region as being “on the brink” - all parties involved must proceed with caution, and rely on reputable intelligence to move forward.
*Those six countries are, in order from highest to lowest, Saudi Arabia, Iraq, Iran, the UAE, Kuwait, and Qatar.
