Global shipping routes are already heavily impacted from the Red Sea to the Gulf of Aden because of ongoing geopolitical strife. If the Strait of Hormuz is in any way disrupted, the impact on oil and global trade could be huge.
It's a stark fact: more than 80% of global goods trade is transported by sea. And any disruption in maritime trade can have a profound impact on the worldwide economy. The latest potential flashpoint is the Strait of Hormuz. It's a vital artery that carries around a fifth of the world's oil. It's been at the centre of numerous geopolitical tensions for many years. Any disruption could have yet another negative economic impact on the global economy, hampering vital trade routes and lengthening transit times, resulting in production delays and higher inflation.
But the Strait is not the only place where there's deep concern about security.
Trade and shipping are increasingly politicised
For some time now, the Strait of Bab el-Mandeb-Suez Canal, which handles around 15% of global maritime trade, has seen significant disruption due to attacks by Houthi rebels on ships in the region. The Red Sea is still largely being avoided, with daily transits down two-thirds year-on-year, according to IMF PortWatch data. On the other side of the globe, a drought at the Panama Canal, which handles 5% of global maritime trade, is slowly improving as daily transits have risen to 27 in March from 24 in January and 22 in December 2023. Yet, capacity is still off the normal daily average of 34-40 transits, a level currently only expected to be reached again by 2025. And next to this, shallow waters in the world’s main inland shipping waterways could easily return over the course of this year.
Elevated risks could quickly impact trade routes once seafarers and cargo are threatened
Due to the mounting tension in the Middle East, those risk-laden waters have spread from the Red Sea to the Gulf of Aden, and the vital Strait of Hormuz could be caught up in it too. It was only days ago that Iranian forces seized the MSC Aires container vessel. We know from all the disruption in the Red Sea that elevated risks could quickly impact trade routes once seafarers and cargo are threatened and insurance risk premiums go up. As such, trade has become increasingly politicised. It's worth noting here that another maritime area in the scope of geopolitical risks is the Taiwan Strait, which is a gateway to large Chinese ports.
When it comes to international trade, it's difficult to quantify the financial effect of one or two events, whether they're geopolitically related or not. That said, you may recall the blockage of the Suez Canal by a container ship, Ever Given, in 2021. That led to an estimated loss of 0.2 to 0.4 percentage points in global trade. Low water levels in the Rhine in Germany had a negative impact of 0.3% on GDP numbers due to higher transport and trade costs and production delays.
Three of the world’s key maritime choke points currently face disruption
The Strait of Hormuz is a key route for global oil and LNG transport
Here's why the Strait of Hormuz, that key maritime choke point connecting the Persian Gulf with the Gulf of Oman, is in trade watchers' focus. The Strait is critical for transporting oil, petroleum products and LNG. Saudi Arabia, Iraq, UAE, Kuwait, Iran and Qatar produced 22.8 million barrels of oil a day, and some 20 million were transported daily via this route. That equates to 20% of global crude and refined product consumption.
If Iran were to attempt to disrupt or block oil flows through the Strait of Hormuz, the country itself wouldn't be the only one which would suffer. Iraq, Qatar and Kuwait would be severely disrupted as these countries usually transport 100% of their crude oil exports through the Strait of Hormuz. Unlike the Red Sea, there’s no real alternative for shipments through this channel. To some extent, the East-West crude pipeline (Abqaiq-Yanbu) across the Arabian Peninsula and the Abu Dhabi Crude Oil pipeline are alternatives for Saudi Arabia and the United Arab Emirates. The former, however, leads into the already circumvented Red Sea.
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