Strait of Hormuz: If Iran Closes It, Where Does Price of Oil Go?

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Iran, faced with global trade embargoes and a possible attack by Israel on its nuclear installations, has threatened to close the Strait of Hormuz.

The strait is one of the world's most strategic shipping channels. It connects the vast majority of the world's countries with the crude oil that fuels their economies.

The oil is not just from Iran but also from oil-rich producers Saudi Arabia, Kuwait, Qatar and the United Arab Emirates that feed energy-hungry consumers.

At its narrowest point, the strait is 21 miles wide, with a two-mile shipping lane on either side. Iran controls the north, but the south is controlled by Oman.

Daily, 14 supertankers sail through the strait. The largest can carry more than 320,000 tons of cargo.

Roughly 40 percent of all U.S. crude imports sail through the Strait of Hormuz.

Would could happen if the strait is closed? What about the hundreds of ships, not all oil tankers, that pass through every day?

17 Million Barrels a Day

Bob Bandos, president and CEO of GAC North America, a marine logistics and service company headquartered in Dubai, said tankers can haul 1.8 million barrels of oil a day through the strait.

The U.S. Energy Information Administration said that's the equivalent of 17 million barrels of oil.

If it that supply is choked off, the effect would be similar to the fuel shortages of the 1970s - but more extreme, Bandos said.

"That would be nothing compared to this," Bandos said, who added the shortage would be global. During the 1973 Yom Kippur War between Israel, Egypt and Syria, Arab oil exporters declared an embargo from October 1973 that lasted until April 1974.

World oil prices shot up from $3.40 a barrel to $12. Overall, the world shut off 7 percent of daily production. This week, by contrast, oil has been selling for about $109 a barrel.

Iranian officials have said they could hold the strait for at least a month. They boast of a missile defense system that prevents ships from traveling through the area.

"If that were the case, you're talking about millions and millions of barrels of oil that will not get out," Bandos said. "It's going to create more havoc on oil."

War games triggered a jump

A closure would have a devastating effect on the global economy because oil shortages will hit countries where they are most vulnerable.

To prove a point, Iran in January held war games in the strait. The mere rumor of a temporary closure sent crude oil prices soaring to more than $112 a barrel.

Crude oil prices have since dropped, but fed by fears of war, prices on Thursday climbed to $109.15

"Iran has a lot of leverage here," said GAC's Bandos, who added he believes a closure would trigger U.S. intervention. A closure would also violate international law.

The shockwaves would ripple far beyond global stock markets.

Companies that charter shippers to haul their goods will be in a particular bind, Bandos said. Companies usually spend anywhere between $30,000 and $120,000 a day to charter a tanker ship, and that does not include bunkering and fuel costs.

A closed waterway might also trigger a slew of litigation. Depending on how long the strait remains closed, tons of materiel and cargo could sit in limbo in port, or idle in the water.

The closure of the strait would also hurt local Middle Eastern economies that would be deprived of non-oil trade going through the strait, Bandos said.

One thing is clear: If the strait closes, global economies would suffer. Oil prices are sure to hit record highs.

If the 1973 embargo experience repeats itself, the price of a barrel of oil could soar to $440 a barrel.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Commodities

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