The Global Oil Gamble in an Iran–Israel Showdown (Part 2)

IV. Supply Disruptions

1. Immediate Effects

A sudden closure of the Strait of Hormuz – whether through an Iranian declaration, mining the waters, or active conflict – would have instantaneous disruptive effects on global shipping. On any given day, tankers carrying ~17–20 million barrels of oil attempt to transit Hormuz, along with LNG carriers and cargo ships. If the strait were deemed unsafe or blocked, these vessels would either be stuck at anchor or forced to reroute (if possible via much longer paths). The immediate result would be a supply bottleneck: crude that was en route to refineries in Asia, Europe, or the Americas would face delays or cancellation. In the first hours and days, we would see tanker rates and insurance premiums skyrocket. Notably, during a series of tanker attacks near Hormuz in June 2019, war-risk insurance premiums for ships in the Gulf jumped tenfold as insurers reacted to the heightened danger.

Some shipping companies halted new bookings to the Middle East altogether when vessels were attacked.

A closure scenario would amplify this effect dramatically – insurance costs could become prohibitive, effectively freezing commercial shipping movement. Ports like Fujairah (UAE) or Bandar Abbas (Iran) would fill up with backed-up tankers. Additionally, the physical risk to vessels would drive immediate price premiums on freight rates.Note that even a temporary disruption in Hormuz can create substantial supply delays and raise shipping costs, as alternate routes are far longer or nonexistent.

Within days of a closure, oil export terminals on the Gulf would face storage overflow, and production might have to be curtailed if tankers cannot offload the crude. In summary, the first-order effects include halted tanker traffic, a scramble for alternate routes, spiking transport costs, and an almost panicked sentiment across energy markets anticipating shortages.

2. Export Bottlenecks

A prolonged closure of Hormuz would effectively strand the bulk of Persian Gulf exports, creating an enormous bottleneck. Over 90% of the oil that Gulf countries normally send to world markets would be unable to leave the region. Saudi Arabia and the UAE could attempt to reroute some crude through their pipelines to Red Sea and Oman ports, but as discussed, only a small fraction (perhaps 2–3 million b/d) can be diverted that way. 

That leaves an upwards of ~17 million b/d that has no immediate outlet. In practical terms, this means countries like Kuwait and Iraq would see almost 100% of their exports halted, since they lack significant bypass pipelines. Qatar’s LNG exports (about 77 million tonnes per year, or 20–30% of global LNG supply) would also be cut off, as LNG tankers cannot easily use pipelines and must traverse Hormuz. 

Even Saudi Arabia would face a major shortfall; while it could send perhaps 5 million b/d via the East-West pipeline, it currently exports ~7 million b/d through Hormuz – so at least a couple million barrels per day of Saudi capacity would be bottled up. Iran’s own exports would cease as well, removing around 1.5 million b/d of oil from the market (ironically punishing Iran’s economy, a self-deterrent we discuss later). Overall, the loss of roughly 20% of global daily oil supply overnight constitutes an unprecedented supply shock.

For context, even during the 1973 Arab Oil Embargo, the reduction in global supply was on the order of 5–10%, and in the 1979 Iranian Revolution it was about 5% – those events caused chaos in oil markets. A Hormuz closure would far exceed those, potentially the largest deliberate supply disruption in history. 

The ripple effects would extend down the supply chain: refineries in Asia and Europe dependent on Gulf crude might have to curtail operations within weeks due to lack of feedstock. Many refineries are optimized for Middle Eastern grades, so replacing that oil on short notice could be technically challenging. Additionally, oil-exporting countries outside the Gulf (like Russia, the U.S., or West African producers) would not be able to instantly ramp up output to fill a ~17 million b/d gap – especially given many are already near capacity or constrained by other issues. 

=> Thus, the bottleneck at Hormuz would translate quickly into a global supply crunch, with physical shortages in certain regions if the situation persisted beyond strategic stock releases.

3. Speculation, Hedging, and Panic Buying

Oil markets are not driven solely by physical supply and demand, but also by expectations and financial dynamics. In a Hormuz crisis, we would expect a frenzy of speculative trading and hedging activity. The mere mention of Hormuz in threatening contexts has been enough to jolt markets in the past.

Traders (from big hedge funds to oil companies’ own trading arms) would likely bid up crude futures and options aggressively as a hedge against physical shortage. Volatility indices for oil could shoot up as market participants rush to buy call options (bets on higher prices) or insurance via derivatives. This defensive hoarding and speculation can amplify price movements.

Panic buying might also occur at the government level – for example, countries fearful of running out of oil might start topping up their strategic reserves or commercial stockpiles at any price available, which further boosts demand in the short term. We might see importers like China or India bidding frantically for any barrels that can be diverted to them, even if it means outbidding regular buyers.

On the flip side, some traders might bet on the crisis being short-lived, introducing volatility as news flows shift (any hint of diplomatic resolution could trigger a sharp pullback in prices, only for renewed fighting to send them up again). 

Derivative markets would be extremely active: the cost of oil price insurance (implied volatility) could reach record highs. The situation would also strain the global shipping industry – as mentioned, freight rates and tanker insurance costs would surge.

This might lead to a peculiar situation where some oil is “stranded” not for lack of production but because chartering a tanker to move it becomes prohibitively expensive or risky. Additionally, speculative storage could occur: if traders expect higher prices in the near future, they might hold oil in storage (or even in tankers offshore) to sell later, which ironically can worsen immediate shortages. 

=> Overall, a Hormuz closure would send shockwaves through energy financial markets: expect wild price swings, record trading volumes, and a significant risk premium priced into oil until the crisis is clearly resolved.

V. Global Mitigation Measures

1. Strategic Petroleum Reserves (SPR) Deployment

In the face of a severe supply disruption from a Hormuz closure, one of the first lines of defense is the release of strategic oil stocks by consuming nations. The International Energy Agency (IEA) — which coordinates emergency responses for major importers — has indicated it stands ready to tap into emergency oil reserves to stabilize markets.

Collectively, IEA member countries (plus some partners like China and India) hold about 1.2 billion barrels in public strategic reserves. Equivalent to roughly 12 days of global oil demand or several months of imports for those countries.

In an extreme scenario, a coordinated SPR release could inject a significant volume of oil into the market to offset the lost Gulf barrels. For instance, the IEA could authorize an initial draw of, say, 2–3 million b/d from stocks, which might cover a portion of the shortfall. 

The United States, holding the largest SPR (over 600 million barrels, though recently drawn down), could unilaterally release oil as it did during past crises. Similarly, China and India have been building their reserves and could contribute by releasing barrels to their domestic refiners. Such moves can buy time and help cap panic in the market – indeed, the mere announcement of readiness to use reserves can calm price spikes. In June 2025, amid Israel-Iran tensions, the IEA explicitly said the world was “well supplied” and it could release reserves if needed.

Strategic reserves are a powerful tool to cushion the initial blow of a supply crisis, they are a temporary bridge. They could mitigate price spikes for a few weeks or months, but cannot fully replace a prolonged loss of ~20 million b/d without running down emergency stocks to critically low level.

2. Rerouting and Infrastructure Use

Countries and companies will also attempt to reroute oil flows and maximize alternative infrastructure to work around the blocked strait. As discussed, Saudi Arabia and the UAE have pipeline routes bypassing Hormuz. In a crisis, these pipelines would run at full throttle. 

• Saudi Aramco’s East–West pipeline (to Yanbu on the Red Sea) can handle about 5 million b/d under normal conditions (with emergency expansion up to 7 million b/d achieved in the past ).

• The UAE’s Habshan–Fujairah pipeline can carry about 1.5–1.8 million b/d to the Gulf of Oman.

=> Together, if fully utilized, these could move roughly up to 3.5 million b/d out of the Gulf without using Hormuz.

During a closure, Gulf producers would divert whatever possible through these lines – for example, Saudi Arabia could ship some of its oil from Red Sea ports to Europe or North America, and the UAE could continue supplying some Asian customers via Fujairah. However, this still leaves the vast majority of Gulf exports unshippable, so rerouting is only a partial solution.

There are also smaller-scale workarounds: some Iraqi oil from the north can flow by pipeline to Turkey’s Ceyhan port (bypassing the Gulf), though that route has limitations and has faced its own outages. Likewise, pipelines within Saudi Arabia or from the Neutral Zone to Red Sea could be optimized.

Beyond pipelines, another rerouting concept is using alternative export facilities – for example, Oman’s ports (like Sohar or Duqm) might be utilized for oil from neighboring countries if overland connections exist. 

=> But currently, such interconnections are minimal.

It’s also possible that some oil could be swapped regionally: e.g., Iran, which can’t export during the closure, might store oil onshore or in tankers, while other countries draw from elsewhere – but this is logistically complex. Importing nations would also reroute their procurement: countries that normally rely on Gulf oil would try to buy from other suppliers (e.g., more North Sea, West African, U.S. oil), which in turn means shipping routes lengthen (adding cost and time). This logistical scrambling has limits, as transport capacity (tankers) is itself constrained.

Moreover, if the conflict expands, even alternate routes like the Red Sea (Bab al-Mandeb) could be threatened by proxies (the Houthis have attacked ships there before). Indeed, during the 2024–2025 tensions, ships were advised to avoid the Red Sea’s risky areas as well . Thus, while every available pipeline and port would be pressed into service to alleviate the Hormuz blockade, the infrastructure simply cannot fully replace the strait’s throughput.

VI. Economic and Geopolitical

1. Global Inflationary Pressures

A closure of Hormuz and the resulting oil price shock would reverberate across the global economy by fuelling inflation. Oil is a core input for transportation, electricity in some regions, and as a feedstock for chemicals; thus a sharp rise in oil (and gas) prices raises costs economy-wide.

=>  If crude prices jump into the $120–150 range, consumers will feel it at the pump and in their utility bills. Businesses facing higher fuel and shipping costs will pass those on in the form of more expensive goods and services.

Energy-intensive sectors – airlines, trucking, shipping, manufacturing – would see significant cost spikes.

Countries that rely on imported oil (which is most countries) would experience deteriorating trade balances and currency pressures, which can also be inflationary. 

Historically, the 1973 oil embargo and 1979 crisis caused stagflation (high inflation with recession), and even the 2022 price surge (when Brent neared $120 after the Ukraine invasion) pushed inflation to multi-decade highs in many economies. 

=> A Hormuz-related shock could be even larger. 

Central banks, already battling inflation in many places, would face a dilemma – tighten monetary policy further to combat energy-driven inflation, at the risk of deepening any recession caused by the crisis.

Developing countries could be hit hardest by both inflation and actual energy shortages, potentially leading to social unrest (similar to how past price spikes sparked protests in some oil-importing nations).

There’s also a fertilizer and food link: with higher natural gas prices (due to lost LNG from Qatar), fertilizer production could decline, driving up food costs and hurting agricultural output

=>  In sum, a Hormuz shutdown would export inflation worldwide, squeezing household incomes and complicating economic recovery efforts.

2. Investor Flight and Market Instability

The onset of a major Gulf crisis would likely spark a flight to safety in global financial markets. Investors, fearing a war-induced recession and uncertainty, typically flock to safe-haven assets:

• Gold prices to rally strongly (as gold is seen as an inflation and crisis hedge)

• The U.S. dollar to strengthen

• Government bonds of stable countries (e.g. U.S. Treasuries, German Bunds) could see increased demand, pushing yields down, as investors seek low-risk parking for their money.

On the flip side, equity markets would likely slump, particularly in sectors directly affected by oil (airlines, automakers, logistics firms would be hard-hit by fuel costs).

Broad stock indices could decline amid concerns that surging energy prices will erode consumer spending and corporate profits – already on the initial news of strikes and retaliation in the hypothetical June 2025 scenario, the S&P 500 fell over 1% in a day.

The combination of high inflation and economic shock could revive fears of stagflation, a toxic environment for stocks.

Currency markets could see sharp moves: oil importers’ currencies (e.g. Indian rupee, Japanese yen) might weaken on higher import bills, while oil exporters (if they can still export) could see currency strength – though in this case, many exporters can’t export, so their currency advantage is moot.

If the conflict drags on, financial stability could be tested – banks and commodity traders could face losses if companies default under the strain of high energy costs.

=> In summary, the immediate reaction in finance would be risk-off: money moving to safer assets, higher volatility, and a general caution until clarity emerges. This reaction could exacerbate the economic impact, as tighter financial conditions (higher borrowing costs for businesses except the safest governments) add to the headwinds from energy prices.