Analysis: Why Iran's influence over the Strait of Hormuz is here to stay

Iran has gained a new source of influence over the global economy and is not willing to give it up.

Tehran has demonstrated that it is capable of effectively blocking the world's most important oil chokepoint with relatively few missiles and drones. Its influence over the Strait of Hormuz will last well beyond the conflict itself, according to several analysts who spoke to CNN, regardless of what is agreed with the White House.

The latest exchange of attacks between the United States and Iran suggests that an agreement may still be some way off. But even if it happens, experts say it is unlikely to strip Iran of its new energy weapon.

This has significant implications for the global economy, which is already suffering from a historic energy shock. Before the war, the world received about a fifth of its oil and LNG (liquefied natural gas) supplies through this now hotly contested waterway.

Efforts to diversify supplies away from the Straits - and the Middle East - will likely improve energy security, but at a cost. In addition to energy, lingering uncertainty over the safety of the strait will affect other products, from fertilizers and jet fuel to helium and aluminum.

"What Iran has demonstrated is that it has the power to close the strait and keep it closed, even in the face of immense bombardment from the US and Israel," said Gregory Brew, senior analyst at Eurasia Group, a political risk consultancy. "And that's something no one can ever take away from them," he added.

"It's their new nuclear option."

A toll in Hormuz?
Several analysts argue that an open Strait of Hormuz, even if partially controlled by Iran, would cause less damage to the global economy than one that is closed.

Kpler, a business intelligence firm, published an article in April about how a strait administered by Iran, in conjunction with Oman, could work in practice. These UK-based academics made similar arguments. In other words, the idea, however alarming, has become part of the mainstream discourse.

Iran, in turn, has taken steps to formalize its control over the strait, in direct opposition to US demands. Last month, it created the PGSA (Persian Gulf Straits Authority) to oversee a new transit protocol, which includes verification by Iranian authorities and, in some cases, payment of fees.

The US, in turn, has already sanctioned the PGSA and banned shipping companies from reaching agreements with Tehran to guarantee safe passage through the strait. The White House has also threatened secondary sanctions against companies that pay fees to Iran.

Still, some oil traders and shipping companies have reportedly made deals with Iran in a desperate effort to get oil to global markets, where supplies are rapidly depleting.

"The important thing is that the flow through the Strait is resumed in significant volumes. This would begin to eliminate the energy shock," said Alan Gelder, senior vice president of refining, chemicals and petroleum markets at Wood Mackenzie, a research firm.

On the other hand, if the Strait of Hormuz remains closed until the end of the year, prices for Brent oil, the global benchmark for the sector, could reach US$200 per barrel, transforming the energy shock "into a global economic crisis", added Peter Martin, director of economics at Wood Mackenzie.

Oil prices will reflect increased risk
A passage fee through the Strait of Hormuz would be much less onerous, at least for oil prices, if it meant tanker traffic returned to the pre-war level of about 140 vessels per day, according to Gelder.

He estimated that a transit fee of $2 million per tanker - the amount Tehran has charged at least one vessel, according to maritime intelligence firm Lloyd's List - would add only about $1 to a barrel of oil.

"The concern with any management (of the strait) is the degree to which it restricts flows," Gelder warned, questioning, however, how Tehran would manage the logistics of overseeing 140 oil tanker transits per day.

Energy consultancy Rystad, in turn, believes that a premium of US$1 to US$2 per barrel in oil prices is a conservative estimate. "We're talking about a geopolitical risk premium of $10 to $20 per barrel," Jorge Leon, head of geopolitical analysis at Rystad, told CNN.

"We are convinced that Iran will maintain some kind of influence over the Strait of Hormuz going forward," in which case "the risk of further disruptions in the strait... is real," he added.

"We will not return to oil prices of US$60 per barrel", where they were at the beginning of the year, "not even in 2027".

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Alternatives to the Strait
Regardless of whether Iran institutionalizes its control over the Strait, questions about the long-term security of the waterway will remain. Such concerns have already led major Gulf oil producers to utilize and invest in alternative export routes.

Saudi Arabia and the United Arab Emirates have redirected their oil exports through the East-West and Habshan-Fujairah pipelines, respectively. The UAE is already working on building a second pipeline to bypass the strait.

But, for other countries in the region, alternatives to the strait are less viable from a political and commercial point of view. Kuwait, Qatar and Bahrain, for example, would need to transport their exports through pipelines passing through Saudi Arabia or Iraq.

Constructing pipelines involves "large infrastructure projects, often cross-border, which means they are expensive, complex and time-consuming," said Wood Mackenzie's Gelder.

For Qatar, which exports about a fifth of global LNG supplies, an alternative solution to the Strait of Hormuz would involve not only building costly pipeline infrastructure but also investing in liquefaction facilities at ports to transform pipeline gas into LNG to be shipped around the world.

The new energy infrastructure would also not be immune to Iranian attacks, as the experience of the war demonstrates. The pipelines "would be within range of Iranian missiles and drones," said Eurasia Group's Brew.

Energy security in focus
The disruption caused by the war in the Strait of Hormuz has intensified the focus on energy security around the world and comes in the wake of the energy crisis triggered by Russia's invasion of Ukraine in 2022.

Efforts are already underway to diversify energy supply chains away from the Gulf, which will boost investment in other oil-producing regions, such as Latin America, as well as in electrification and renewable energy.

Still, the oil-rich Middle East will remain critical to meeting the world's energy needs for some time to come, making Iran's new energy weapon even more potent.

"The global economy... will have to recognize this reality," Brew told CNN. "This is of colossal importance... it suggests that ultimately the security of the Strait of Hormuz and the Persian Gulf will depend in large part on the actions and decisions taken by Iran."

Source: CNN