The closure of the Strait of Hormuz is the third major challenge to the world’s globalised trading system.
It follows Covid, and Russia’s invasion of Ukraine, as we discuss in a new analysis for ICIS Chemical Business.
It is leading to an increasingly rapid move to more regional trade patterns:
- Companies were just about able to cope with Covid disruptions
- Russia’s invasion created further stress
- Today, they are actively looking for alternatives
EU Commission President Ursula von der Leyen spelt out the geopolitical background last September, as the chart shows.
She warned that “Battle lines for a new world order based on power are being drawn right now”.
The Hormuz closure only confirms the importance of her insight.
Essentially, we are returning to a world of Great Power conflict:
- 1945-1989. Europe was the epicentre of a Cold War world polarized between the US-led NATO and the Soviet Union-led Warsaw Pact
- 1989-2022. The fall of the Berlin Wall then generated a peace dividend delivered by rules-based international organisations such as the UN and WTO
- 2022-?. But today, countries are returning to a world of Great Power conflict based on ‘Spheres of Influence’ covering the Americas, Europe and Asia
We also know that the two sides start from positions that the other side find very difficult to accept. As The Atlantic has noted:
“Iran’s terms for a settlement are those of a victor: They demand war reparations, no limits on uranium enrichment, recognized control of the Strait, and an end to sanctions.”
This suggests it may be best to assume that whilst the truce may continue, a peace deal may prove elusive. And as Dow Chemical’s CEO, Jim Fitterling, has warned:
“Even if the Strait were to reopen today, just to clear the logistics logjam… is going to take 275 days, maybe more.”
This background provides the context for today’s conflicts:
- There will, of course, continue to be inter-regional trade
- But this will need to have specific justification in terms of filling portfolio gaps
- And it will need careful assessment of supply security
THE COSTS OF THE CLOSURE ARE RISING
Today’s disruption has its own costs. Suddenly product isn’t available any more. And working capital starts to rise, as the Apollo chart confirms for the USA:
- Scenario A (Partial Reopening): 60-day US–Iran MOU holds, Strait recovers to ~40% normal flow by Aug 2026
- Scenario B (Protracted Stalemate): MOU collapses, Strait remains below 10% through Q4 2026, companies structurally rebuild buffers
- Scenario C (Structural Reset): Qatar LNG offline 3–5 years, permanent rerouting via Cape of Good Hope, safety stock targets permanently raised
This is why the World Bank, IMF, IEA and WTO have jointly warned that the crisis risks spiralling out of control:
“If shipping flows do not return to normal, continued rapid depletion of global oil inventories ahead of peak summer oil demand in the Northern Hemisphere would present increasing risks for fuel security, market conditions, and broader economic resilience.”
WE NEED TO WIDEN THE SCOPE FOR ASSESSING RISKS
It is obviously far more efficient to have single sources of highly secure supply for key products.
But as Hormuz has reminded us, a single source of supply can easily now become a single point of failure for an entire value chain.
The current UK Risk Register’s rating for a potential disruption of jet fuel supply, for example, suggested this was only a 1% – 5% risk
Yet today, European and other airlines have been scrambling to obtain supplies for the critical summer season.
But if refineries produce more jet fuel to meet summer demand, they have to cutback on diesel and gasoline output. As the American Fuel & Petrochemical Manufacturers warn
“Increasing the output of one product often reduces another. So, they can shift, to some degree, but they can’t make more of everything at once.”
The jet fuel experience confirms the need for companies (and governments) to urgently revisit their current assumptions over critical risks, and to widen their scope for assessing these.
Please click here to read the full analysis for ICIS Chemical Business.