Strait of Hormuz

Introduction

The Strait of Hormuz is the narrow entrance waterway to the Persian Gulf from the areas of Oman Gulf and the Arabian, which is under Iranian and Omani sovereignty. The narrowest point of the Strait is around 22 nautical miles in width and falls within the Omani and Iranian territorial waters (Yadlin & Guzanksy, 2012). It is worth noting that there are two lanes used by ships in every direction. Those water paths are separated by a buffer, which is two miles wide. Indeed, Strait of Hormuz is regarded as the most significant maritime chokepoint worldwide. Therefore, any interference with the movement of the oil tankers by changing the common routes would immediately affect the energy market in the world. Essentially, more than 90% of the oil exports from the Gulf are transported through the Strait of Hormuz (Yadlin & Guzanksy, 2012).

Strait of Hormuz

 

Strategic Importance in the Global Economy and Energy Market

The stability of the Arab Gulf States is of major strategic significance to the United States. In fact, for all discussions concerning the “independence” of United States energy, the reality revolves around this region. Therefore, despite the increase in fuel supply alternatives outside the Gulf, the strategic position of this region to the United States and the global economy remains relevant. According to Center for Strategic & International Studies (2016), the share of Gulf petroleum output in the world has reduced. Especially, the region in 2013 produced more than 32% of the global amount, which transferred more than 28 billion barrels per day.

Consequently, from a strategic standpoint, the gas tanker and the flow of oil traffic out of the region through the Strait of Hormuz remains the most fundamental energy gate. First, the waterway is of strategic importance because, in 2013, approximately 17million barrels were transferred each day using the route. Indeed, the oil flows through the Strait were more than 30% of the seaborne-traded goods (Yadlin & Guzanksy, 2012). According to the Lloyd’s List Intelligence data through the tanker tracking service, EIA indicated that the crude oil transported by means of the Strait route to the Asian market was more than 85%, (Center for Strategic & International Studies, 2016). In this aspect, Japan, China, South Korea, and India were the major destination of the crude oil through the same waterway.

In addition, through the Strait of Hormuz, Qatar was able to export around 3.7 trillion cubic feet of LNG (Liquefied natural gas) every year (Center for Strategic & International Studies, 2016). In fact, the volume represents more than 30% of the total LNG trade in the world. On the same note, the LNG import tankers for Kuwait travel through the Strait of Hormuz. but, in this case, the movement is towards the north. It is worth noting that the narrowest point of the Strait is around 21miles with a width of only two miles. However, the waterway is wide and deep enough to support largest tankers carrying crude oil with two-thirds of all the shipments with 150,000 deadweight tons (Center for Strategic & International Studies, 2016). Notably, the Strait of Hormuz continues to be a strategic place for the stable exports of oil to the United States. In fact, there are limited means of transport and very few functioning pipelines that would provide alternative routes for exports. Furthermore, the alternative export ways have limited capacity and are currently functioning to their ultimate capacity or under military threat.

Another strategic importance of the Strait is that the Persian Gulf becomes the home to the global spare oil production. The current estimate for the world spare oil is around 3 Mb/d. In fact, the members of the OPEC hold the spare capacity owing to their management strategy (Pham, 2010). It is worth mentioning that the spare capacity is controlled by Persian Gulf producers of oils. Besides, the reserves are seen as a cushion in the turbulent oil market and can be used to offset any disruption of oil supply. Definitely, the spare capacity might not be readily available for supply if the Strait of Hormuz is disrupted; thus, the strategic importance of this waterway seems to be beneficial to all oil suppliers and consumers.

How the Tension Could Affect World Energy Supply and Oil Prices

Ultimately, the threats by Iran to close the water path would have far-reaching impacts on the world economy. However, many observers aver that the Iran economic dependence is premised on the commercial nature of the Strait. As such,  the country anticipates to shape the international debate on its policy rather than to close the waterway (Congressional Research Service, 2012). Although the oil exports are fundamental to the Iranian fiscal health and the economy as a whole, the country depends on the Strait for the shipment of the crucial medical and food products. In fact, Iran could try to import its product through other ports away from the Strait of Hormuz, including Jask or other overland trade ways through Iraq and Pakistan. However, the country is determined to use the issues of the waterway to assert its position and importance in the global market.

First, the threat of closing the waterway, which is the major artery of the global oil market, would bring unprecedented disruption to the global oil supply and consequently hike the prices. Currently, the threat to close the Strait is seen as a low-profitability model. Additionally, if such a decision were taken, it might not prolong due to serious financial losses. Ultimately, Iran would be isolated by those nations that oppose oil sanctions and pursue the previous model; thus, no country would be willing to import its oil.

Secondly, the continued threats from Iran without taking actions could trigger tension in the world oil market. In fact, such turbulence in the world economy would take place only if the world players in the oil market considered such threat seriously. In addition, if the disruption of oil route occurs, the United States will offset the effects by releasing the oil stocks from its Strategic Petroleum Reserve. Certainly, the action of using stored oil might be coordinated among other nations that have strategic reserves as it was demonstrated in 2011 by International Energy Agency after the crude oil supply was disrupted in Libya (Congressional Research Service, 2012).

Thirdly, the tension that would arise if the threats to close the Strait were pursued could lead to infrastructure damages and harassment. In this aspect, the Iranian government would put various measures by partially shutting down the waterway as it was the case during the 1980s Iran-Iraq war. By and large, critical export infrastructure and energy production would be damaged if Iran and United States started the military actions in the region. Under those premises, the damage and harassment could contribute to the reduced exports from the Persian Gulf, higher costs of shipping, and uncertainty of oil supply, as well as higher oil prices. In essence, the harassment would trigger a military response, which would alienate the remaining oil customers from the Iran.

Finally, the disruption Strait of Hormuz as the essential energy artery would significantly affect the Asian market. The flow of oil to the Far East region is globally integrated. Therefore, if the Asian countries do not import oil from the Persian Gulf, it indicates that their insatiable need for these energy sources will influence their major industries (Congressional Research Service, 2012). Therefore, they would seek other alternatives, which might not meet their requirements.

KSA Proposal

The proposal to build an artificial Canal from the Persian Gulf through Saudi Arabia, Oman and Yemen Borders to the Red Sea is a project of the century. In fact, there are many advantages that will come with this ambitious project. However, various challenges might also be experienced during its erection.

Advantages

• Firstly, the construction of the artificial canal will add around a 1,200km long coastal line to the Empty Quarter with more than 20 tunnels for pedestrian and cars on the Saudi Arabian soil.
• Secondly, UAE, Qatar, and Kuwait will have an alternative route to export their oil products and import their crucial goods, thus avoiding the controversial Strait of Hormuz.
• Thirdly, the canal will increase the Yemen waterfront for almost 700km, which will revive the east area of the country known to suffer from the desert (Toumi, 2015).
• Fourthly, through the banks of the canal, the Empty Quarter will be economically revived by constructing hotels and tourism resorts, two industrial cities, and residential towns. It is worth noting that Saudi Arabia will achieve its goal of self-sufficiency regarding the production of marine products through fish farming and pisciculture in the connected bays (Toumi, 2015). Indeed, the construction plan also include several energy generating projects and water desalination along the canal, which will come in handy for the population of Yemen, Saudi Arabia, and Oman.

Disadvantages

• The construction of the canals will undermine any effort for diplomatic dialogue between Iran and the opposing countries, a situation that is likely to affect the ties between the United States and Iran (Pham, 2010).
• Another obstacle that will be experienced while digging the canal is the differences in altitude. In fact, one side of Saudi Arabia is around 300 meters above sea level while on the sides of Oman and Yemen are more than 700 meters high (Toumi, 2015).
• In addition, the mega project requires a huge spending of more than $80 billion, which is a substantial amount for any economy (Toumi, 2015).