The Strait of Hormuz is in discussion amid the ongoing war between Israel, America and Iran. This narrow sea area falls in the part of Iran and is a very important sea route for the whole world. About 25 percent of the world’s energy supply passes through this route. Amidst the war, Iran has created some obstacles in this path. Meaning, this sea route is not operating smoothly at this time.
It is one of the most sensitive marine energy routes in the world. A large amount of crude oil and liquefied natural gas originating from the Gulf region reaches the global market through this narrow strait. Whenever there is a threat of Hormuz closure, oil prices, shipping insurance, and entire supply-chain systems are shaken.
The question is that if this route is disrupted, will the whole world really go into oil crisis? Are there no viable alternatives to this route? Come, let us know in detail.
Why is Hormuz so important?
The geographical location of Hormuz makes it strategically important. The big oil producing countries in the Gulf, Saudi Arabia, Iraq, Kuwait, UAE, Qatar, Iran, all depend on this route for sea exports. This path is narrow. There is a lot of movement of ships here. It has also been a center of military-political tension on a regular basis. Therefore, as the risk increases here, the movement of tankers slows down. Some companies may change routes but the insurance premium increases immediately. Many times, oil prices go up even before it is completely shut down.
Strait of Hormuz.
If Hormuz gets disrupted, what will be the impact?
The oil market operates not only on actual supply but also on expectations. If sea shipments of big exporters are disrupted, deals with immediate delivery pick up pace. Traders factor potential losses into prices in advance. War-risk coverage increases, tanker charter rates go up. Along with crude oil, the prices of many products increase. As energy becomes more expensive, the cost of transportation, food supply and industry increases.
Is there any alternative to this route possible?
There are options, but their potential, geopolitical risks, and costs limit them. Broadly speaking there are a few options.
- line pipe: This provides minor relief but is not capable of providing complete compensation. Some Gulf countries have built pipeline networks to reduce dependence on Hormuz. Saudi Arabia’s East-West Pipeline provides the ability to transport oil from the Gulf to the Red Sea coast and ship it out in tankers. A portion of the exports from the UAE pipeline may exit from the Fujairah terminal in the Gulf of Oman, outside Hormuz. This alternative arrangement partially works. In case of crisis, all the oil cannot go through these pipelines. Their capacity is limited and not all producing countries have equal options.
- Changing sea routes: This increases distance and cost. If passage through Hormuz is difficult, some shipments have attempted to divert to the Red Sea or other routes, but the additional distance increases freight costs. Vessel availability and port capacity may be limited. There are other geopolitical risks on some routes, meaning that it is possible to change the route but at the press of a button global supply may not remain the same.
- Strategic Reserves and Alternative Supplies: Many countries have petroleum reserves, which can be released in case of emergency. This step sends a message to the market that the shortage can be dealt with immediately. Depending on one’s capacity, supply can be maintained for a few weeks or months. This gives temporary stability to prices. Also, efforts may be made to increase additional supply from areas like America, Brazil, Norway, West Africa etc. But increasing production takes time. Meaning, the gap between demand and supply becomes clearly visible.
JUST IN: Video shows ship traffic in the Strait of Hormuz over the past 24 hours. pic.twitter.com/8Y8YOHNGJx
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The option is there, but not the scale.
The real crisis of Hormuz is not that if the road is completely closed then nothing will be left. The real problem is that the volume that passes through on normal days is almost impossible to suddenly replace completely with one or two alternatives. So the result is often greater disruption, higher prices, and uncertainty than a complete blackout.
Why can’t a new canal be built?
The question that often comes up is that if the Strait of Hormuz gets closed, then why not build a new canal for ships around it so that the path remains open? This idea sounds very attractive, but there are many difficulties in implementing it on the ground. Plans and discussions were made in this direction at different times, but they could not progress.
The biggest obstacles are geography and mountains
Near Hormuz lies the area of the Musandam Peninsula, where the Hajar Mountains are present. There are high peaks here and a large part of the terrain consists of hard, solid rocks. If a canal is to be built through this area, a sea-level waterway structure will have to be built by cutting rocks over a long distance. This is a very big and risky task from engineering point of view and also expensive.
The cost will be more than imagined
Such a canal would require large-scale excavation, blasting, tunneling, cutting, embankments, lock systems, port terminals, security infrastructure and maintenance. For this reason the estimated cost of such a project is considered extremely high. So much so that it can outweigh many major global canal projects. Also, not only construction, time and financing can also become major challenges.
Politics and consent are the other wall
The canal is not just an engineering project, it is also an issue of boundaries, sovereignty, security and strategic control. Oman, UAE and other Gulf countries have their own interests and concerns in this region. Agreeing on a route or corridor, setting up a control structure, setting up security arrangements, and managing international responses can complicate the project.
Idea of an alternative straight canal, but same problem
Sometimes another option is also discussed. A relatively straight canal can be built from Abu Dhabi towards Sohar. But, this route also involves hilly terrain and difficult geography. As a result, the technical complexity and estimated cost increases significantly here too and questions are raised on the feasibility of the project.
Diplomatic role and regional balance
Oman is often considered a country that plays the role of mediator between regional tensions. In such a situation, any huge, strategic canal project is no longer just an economic initiative. It also has geopolitical implications and security implications. For this reason, reaching a broad consensus may be even more difficult. Building a canal around the Strait of Hormuz sounds like a solution on paper, but in the real world it is extremely challenging due to difficult geography, extremely high costs, and multi-country political consensus.
What is the impact on importing countries like India?
For a country like India, the impact of the Hormuz crisis can be at many levels. Current account comes under pressure due to increase in import costs. Whether the government adjusts taxes or increases prices, both have their own challenges. High import bill may put pressure on the currency. Transport, fertilizers, chemicals, aviation, all sectors are affected. The strategy for India is usually a mix of source diversification, strategic reserves, refinery flexibility, and diplomatic stability efforts.
If the Strait of Hormuz is blocked, a situation like oil crisis may arise in the world, but there is no option at all, this cannot be considered right. Alternatives include pipelines, alternative sea export points, strategic reserves and supplies from other regions. But, they cannot operate immediately on the same scale as Hormuz. So the reality is that a major disruption in Hormuz could create sharp price increases, supply uncertainty and economic pressure in the global market.
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