a day ago
The connection: Supply chains and geopolitics
Over the decades, the supply chains have become a highly integrated web of interconnections driven by globalization. However, the global supply chain landscape is experiencing constant reorientation and stress in recent years due to the increasing strain of disruptions. The key events that have impacted the supply chain from all fronts are the Covid-19 pandemic, the Russia-Ukraine war, the Israel-Palestine war, China-US Trade War 1, and Trade War 2, which was initiated by sweeping tariffs introduced by the trump administration in his current second term.
Now, the US bombing of three of Iran's nuclear facilities, and the retaliatory response of Iran bombing the US air base in Doha, Qatar, has put the entire Middle East and the world in a state of heightened uncertainty and could trigger a significant disruption of supply chains and a probable spike in oil prices. Energy analysts fear a specter of panic buying in the international energy market if the situation escalates further.
To get a perspective, the Strait of Hormuz is the world's most strategic and critical chokepoint, a narrow stretch of water with Iran to the north and the United Arab Emirates (UAE) and Oman to the south linking the Persian Gulf to the Gulf of Oman and the Arabian Sea. It is a vital vein for the passage of Oil and gas shipments.
The Strait of Hormuz is critical as 20% of the world's oil and a third of liquefied petroleum Gas (LNG) pass through this narrow strait. The Strait handles 20.3 million barrels of oil daily, making it crucial for global trade and supply.
The Middle East region is experiencing protracted uncertainty that could affect the global energy markets. The recent US attack on key Iranian enrichment facilities to destroy Iran's nuclear ambitions could affect the movement of ships in this region. The Strait of Hormuz is also a primary export route of Qatari LNG, with a fifth of the global LNG supply passing through this strait last year.
This handout natural-colour image acquired with MODIS on NASA's Terra satellite taken on February 5, 2025 shows the Gulf of Oman and the Strait of Hormuz. — AFP
If Iran stops the movement of ships through this Strait, it would be economic suicide for the world. While they have not done it, they are taking actions to interfere with energy shipments by jamming the GPS signals of tankers in this region. According to maritime intelligence reports, 23% of the region's vessels, approximately 1600 ships, have experienced signal jamming. Many shipping giants have temporarily issued standby instructions to their vessels or rerouted them in anticipation and fear of further geopolitical escalations. The closure or any restrictions to this trade route will have far-reaching implications for the world. It could also strain diplomatic relationships, increase energy prices, sharply raise inflationary pressures, and cause shipment delays.
Over the years, the US has been worried about the vulnerability of the Strait of Hormuz and has gradually reduced its dependency on Middle East oil. It has grown to become one of the world's largest oil-producing nations. Now, the US imports only 10-11% of its oil requirement from Iraq and Saudi Arabia in the Middle East. However, 84% of Hormuz's shipped oil goes to Asia.
The strait is 21 miles wide at its narrowest point, with shipping lanes only 2 miles across. A blockade could halt 20% of global oil instantly. Businesses exploring diversifying logistic pathways face significant operational, economic, and geopolitical hurdles. The Strait of Hormuz remains irreplaceable for bulk shipments; it is, in fact, the most viable option for global trade shipments.
Given the geopolitical escalations, trade wars, regional instability, and unpredictability of political decisions, the Strait of Hormuz is more than a strategic trade gateway; it has become a geopolitical weapon, magnifying its significance for sustainable international trade and global supply chains.
