Strait of Hormuz: Why Iran Holds the World’s Oil in Its Hands

Iran produces about 3.5 million barrels per day, roughly 4 per cent of global supply. On paper, that is a level that other producers could possibly replace. But that answer misses the real issue.

The bigger story is not how much oil Iran produces. The real story is its location. Iran sits along the northern coast of the Strait of Hormuz, the narrow waterway through which about 20 million barrels of oil move every day. 

That is close to one-fifth of the world’s daily supply. Most of that oil does not even belong to Iran. It comes from Saudi Arabia, the United Arab Emirates, Kuwait, Iraq, and Qatar, all moving through a route Iran is in a position to threaten.

The danger of disruption is no longer just a theory. It is already affecting the market. Tanker traffic through the strait has slowed sharply as shipping companies pull back amid security concerns.

The International Energy Agency has described the situation as the most serious disruption to energy markets in decades and has announced the release of 400 million barrels from strategic reserves held by member countries, the largest release ever recorded.

Around three-quarters of all the oil passing through the Strait of Hormuz is headed to China, India, Japan, and South Korea. China is especially vulnerable because about half of its crude oil imports pass through this narrow route. Any long closure would hit Beijing hard.

The United States is in a stronger position than many others because it now produces about 14 million barrels of oil a day, making it the world’s largest producer. Even so, Americans are not fully protected. Oil prices are set by the global market, so when supply is threatened anywhere, consumers everywhere feel the impact

The world may not rely heavily on Iranian oil itself, but it does rely heavily on stability around Iran. As long as the Strait of Hormuz remains one of the most important energy routes on earth, Iran will continue to hold major influence over the global economy in a way few countries can match.