In the past week, there has been chatter revolving around the Iranian threat to close the Strait of Hormuz in response to the United States sanctions against Iran. The Strait of Hormuz is a 21-mile wide waterway that is a key chokepoint connecting the Persian Gulf and the Arabian Sea. More than 20 percent of the world’s crude oil is transported through the Strait from not just Iran, but Iraq, Saudi Arabia, the U.A.E., Kuwait, Qatar, and Bahrain.
With American sanctions slated to start November 4th, America’s navigation rules and Iran’s rules will come to a head. Hassan Rouhani’s threat to close the Strait was backed up on Thursday by Mohammad Ali Jafari, the commander of Iran’s Revolutionary Guard, who said “We will make the enemy understand that either everyone can use the Strait of Hormuz or no one.” The current position of the United States is one of providing security in the region. U.S. Central Command’s Bill Urban said “Together, we stand ready to ensure the freedom of navigation and the free flow of commerce wherever international law allows.” Although unlikely, this rhetoric pushes the needle towards a direct military confrontation between Iran and the United States.
The last time the Strait of Hormuz was the focus of international attention was in the 1980’s during the Iran-Iraq War. After a US ship struck an Iranian mine, the U.S. forces in the area attacked the Iranian waters where Iran had repeatedly attacked Kuwaiti tankers and disrupted shipping lanes. Gasoline and diesel prices increased worldwide in response to the dangers facing shipping vessels operating in the area. Even without a direct conflict, the threats and potential disruption could trigger uncertainty in the markets.
Beyond just the impact to the United States and the Gulf countries, China will be closely watching as the situation unfolds. Beijing is exploring putting tariffs on crude oil imports from the United States and could replace them with West African and Middle Eastern crude, namely from Iran. They have also been vocal about not complying with the U.S. sanctions against Iran. At the start of this week an executive from China’s Dongming Petrochemical Group, an independent refiner, said that the refinery will no longer purchase crude oil from the United States and will purchase directly from Iran.