- Is a passage just two miles wide
- The oil-producing countries around the Persian Gulf, including Kuwait, Saudi Arabia, Iraq and Iran, are crucial for supplying the world oil market.
- Most of their exports, around 18 million barrels a day or about 20 percent of world demand, must travel through the Strait of Hormuz
The strait is about 90 nautical miles (167 km) long, with a width varying from about 52 nautical miles (96 km) to 21 nautical miles (39 km)
What if Iran Retaliates and Shuts Down the Strait of Hormuz?
Some 18 million barrels of oil transit through every day. The economic impact would be catastrophic.
The effort on the part of the Trump administration to shut down Iran’s ability to export oil is predicated on the false notion that the rest of the world will fall in lockstep with U.S. policy. But has President Donald Trump really thought through what would happen to the economic health of the world if Iran retaliates, shutting the Strait of Hormuz, through which much of the world’s oil flows daily?
The Trump administration’s push to reduce Iran’s oil exports to zero has entered a new, critical phase, with the United States refusing to extend the waivers it granted six months ago to eight nations, including China, India, Turkey, Japan, and South Korea, to purchase Iranian oil. Moreover, the United States has refused to allow for a “wind-down” period where impacted nations would be able to gradually wean themselves away from Iranian sources of energy. This means that, effective May 1, any nation purchasing oil from Iran will be subjected to punitive U.S. sanctions.
Iran has responded to the American decision not to extend oil waivers in typical fashion, with Rear Admiral Alireza Tangsiri, the commander of the Iranian Revolutionary Guard Command (IRGC) naval forces, warning on April 23 that “if Iran’s benefits in the Strait of Hormuz, which according to international rules is an international waterway, are denied, we will close it”.
This threat was clarified the next day, April 24, by Iran’s Foreign Minister, Javad Zarif, who declared “ships can go through the Strait of Hormuz,” noting that “if the U.S. wanted to continue to observe the rules of engagement, the rules of the game, the channels of communication, the prevailing protocols, then in spite of the fact that we consider U.S. presence in the Persian Gulf as inherently destabilizing, we’re not going to take any action.”
Venezuela, is now an impaired oil giant
Venezuelan oil output has plunged by more than half in 30 years but the country still sits on the world’s biggest crude reserves, so any political changes will ripple worldwide.
The country holds 17.9 percent of proven oil reserves, ahead of Saudi Arabia at 15.7 percent, Canada (10.0 percent) and Iran (9.35 percent), figures compiled by British oil giant BP show.
The International Energy Agency estimates Venezuelan reserves at 303.2 billion barrels, “but much of its oil is extra heavy, which is costly to extract,” an IEA report said.
Output has fallen from more than three million barrels per day in the 1990s to 1.339 mbd last year, according to OPEC data.
Venezuela is an OPEC member and currently holds the cartel’s annual rotating presidency.
– “Disarry” –
Venezuelan output has been hampered by chronic under investment by the nationalised oil company Petroleos de Venezuela SA (PdVSA).
At the end of September, only 25 wells were in operation, compared with almost 70 in early 2016 according to the US Energy Information Agency (EIA).
“The oil industry is in disarray, the national oil company is run by an army official, trained personnel is hard to find and foreign service companies refuse to commit themselves to projects due to payment backlogs,” PVM analyst Tamas Varga commented.
The head of French oil giant Total, Patrick Pouyanne, agreed that operating in Venezuela is difficult.
“The situation there is not easy,” he said. “Frankly, for the past two or three years my priority has been my worker’s safety.”
The oil executive also underscored “difficult access to water, and electricity” in Venezuela.
– Short, long term effects –
In the event of a change in government, global oil prices could rise in the short term, but decline as time goes on, analysts believe.
Venezuelan President Nicolas Maduro counts on support from the army to counter-balance international backing for parliament speaker Juan Guaido, who has proclaimed himself interim president.
That standoff is likely to underpin crude oil prices.
“Any disruption in Venezuelan oil supply will be felt by the market, especially by US Gulf refiners who rely on this heavier crude oil,” ING analysts noted.
Potential US sanctions against Maduro’s government or serious unrest in the country could cut the country’s crude exports.
Once the initial pain had passed however, “an end to the Maduro regime would pave the way for urgently-needed investments in the Venezuelan oil sector,” Commerzbank analysts commented.
“Iraq is a good example of how opening a country up to investment can affect oil production ?- output there has doubled to 4.5 million barrels per day in the last ten years,” they explained.
“A regime change in Venezuela would thus have a dampening effect on oil prices in the medium to long term,” the analysts concluded.