Why Strait of Hormuz global lifeline?

South China Morning Post unveils in a new article that Iran’s parliament has approved a proposal to close the Strait of Hormuz following US military strikes on its nuclear facilities. Although the final decision lies with the Supreme National Security Council and Supreme Leader Ayatollah Ali Khamenei, the approval has already intensified concerns about global energy supply disruptions.

This explainer explores the significance of the Strait and the potential consequences of a blockade.

Why is the Strait of Hormuz so important?
The Strait of Hormuz is a narrow, 33-kilometer passage connecting the Persian Gulf to the Gulf of Oman. It is a vital chokepoint, handling approximately 20 per cent of the world’s oil and gas shipments, according to the US Energy Information Administration.

In 2024, about 84 per cent of crude oil and condensate and 83 per cent of liquefied natural gas passing through the Strait were destined for Asian markets. China, India, Japan, and South Korea were the main recipients, together accounting for 69 per cent of all crude oil and condensate flow via this strategic waterway. These countries would likely be the hardest hit by any supply disruption.

China, the world’s largest oil importer, relies on imports for over 70 per cent of its oil needs, having surpassed the US in 2017. Roughly half of China’s oil imports come from the Middle East.

Has the Strait ever been closed before?
While the Strait of Hormuz has never been fully closed, it has experienced interruptions, including tanker attacks during the Iran-Iraq war in the 1980s, increased Iranian-US naval tensions in 2007, and the 2023 seizure of the Chevron-chartered Advantage Sweet crude tanker by Iranian forces.

What is the worst-case scenario?
Goldman Sachs analysts noted that a prolonged and large-scale disruption of energy flow through the Strait could push oil and European natural gas prices above $110 per barrel and 100 euros ($115) per megawatt hour. They added, “While the events in the Middle East remain fluid, we think that the economic incentives, including for the US and China, to try to prevent a sustained and very large disruption of the Strait of Hormuz, would be strong.”

George Saravelos, Deutsche Bank’s head of foreign exchange research, warned on June 14 that a complete cutoff of Iranian oil and closure of the Strait could drive oil prices above $120 per barrel. “Although oil facilities were also not targeted in previous rounds of hostilities, the market cannot ignore the possibility that a cycle of escalation incurs disruption,” he stated.

Nigel Green, CEO of the deVere Group, said some analysts “now warn that crude could spike toward $130 per barrel,” depending on Iran’s next moves. He added, “Such a price shock would filter through to global inflation, which remains elevated and/or sticky in many regions. Market participants had been pricing in rate cuts from central banks, including the Federal Reserve, in the second half of the year. That is now in question.”