What does it mean if Iran shuts the Straits of Hormuz?

23 Jun 2025 , 01:47 PM

US ATTACKS ON IRAN PUTS THE WORLD MARKETS ON NOTICE

Over the weekend, the US did something that the markets were only discussing in the realm of possibilities. In the wee hours of Sunday, the US and Israel led joint attacks on 3 of the critical nuclear facilities of Iran viz, Fordow, Natanz, and Esfahan. While the US claims to have obliterated these nuclear enrichment facilities, Iran has countered claims saying that the attacks by the US only did peripheral damage.

But, that is not the point. The real issue is that the US has gone ahead and attacked Iran at a time when the US itself was internally divided over US role in the war. That will irk Iran. The US not only sided with Israel, but also led the attacks, using America’s powerful Bunker Busters. It is incumbent on Iran to offer a response. One possible response could be blocking the Straits of Hormuz, but it may not be such a simple decision.

WHY THE STRAITS OF HORMUZ MATTERS TO THE WORLD?

Image Source: The Guardian

To understand why the Straits of Hormuz mattes to the world, one needs to look at its cartography. It is actually the 30 KM stretch between Iran and Oman, but that is not why it matters. Some of the biggest shipments of oil from Saudi Arabia, UAE, Bahrain, Iran, Kuwait, and Qatar pass through the Strait of Hormuz.

Nearly 20% of world oil output and 25% of traded oil passes through the Straits of Hormuz. If you look at oil movement to Asia, nearly 80% of the GCC oil consumed by China, Japan, South Korea, and India goes through the Straits of Hormuz. It is not just oil, but nearly 20% of LNG movement also goes through the Straits of Hormuz, mainly originating from Qatar.

WOULD IRAN THINK OF BLOCKING THE STRAITS OF HORMUZ?

If reports are to be believed, Iranian parliament has already approved the blocking of the Straits of Hormuz, although the final decision will be taken by the Iranian top leadership. In the past, even in the midst of acute sanctions, Iran never tried to block the Straits of Hormuz. Even during the 8-year long Iran-Iraq war, there were attacks on ships, but the Straits of Hormuz was never blocked. So, what is different this time?

In the past, there has never been direct US participation in attacks on Iranian nuclear facilities. Also, Iran is seen as a key regional power in the Middle East / West Asia and it cannot undermine that image. Iran knows that a sharp spike in oil prices will spike inflation in the US and corner Trump. There is a growing wave of support for Iran in the Arab region and most of the Arab nations may be agreeable to a temporary supply squeeze.

WHAT ARE THE RISKS FOR IRAN IN BLOCKING THE STRAITS OF HORMUZ?

However, such a decision is not without its risks, even for Iran. Today, the only country that buys oil from Iran (despite the sanctions) is China. Any blockade of the Straits of Hormuz will not only plug revenues of Iran, but also force China to look elsewhere for oil. That would obviously lead to a flare-up in oil prices. It is also possible that by blocking the oil flow of the entire Gulf region, Iran may lose Arab support.

Remember, Iran has manged to get Arab sympathies after the US attacked their nuclear facilities. The blockade could disrupt the natural flow of trade and Egypt had done it just once in the late 1950s by blocking Suez Canal. It could also sharpen sanctions on Iran and may start calls for a regime change in Iran. Either ways, Iran is likely to be very cautious about any decision to block the Straits of Hormuz.

WILL A BLOCKADE OF THE STRAITS OF HORMUZ IMPACT INDIA?

The impact on India will be sharp and substantial. It virtually blocks the entire Middle East oil coming into India, and that is around 40% of India’s total oil flows. India has to now depend on other sources of oil, which will make the oil market tighter. Also, it would not just be higher prices, but also higher freight cost and higher insurance premia. Analysts are pegging such a blockade to spike oil prices by up to $20/bbl. That would mean a nearly 1% increase in consumer inflation and a 60 bps spike in the current account deficit.

For India, the next few days will be critical. India would be happy if the blockade of the Straits of Hormuz is avoided. A lot will depend on whether Russia and China support Iran. But the one thing India would be looking for is whether Iran succeeds in creating an Islamic alliance against the US and Israel. That could have implications for India closer to our borders; and that is a big concern!