Hormuz: A Looming Danger… Can the Global Economy Survive?

A Three-Dimensional Shock to Energy Markets

The Strait of Hormuz serves as an indispensable lifeline for global energy supplies. Approximately 17 to 20 million barrels per day (bpd) of crude oil and refined petroleum products transit the Strait, accounting for roughly 20% to 30% of daily global consumption. Furthermore, 20% to 25% of total global liquefied natural gas (LNG) trade passes through this waterway.

Qatar’s LNG and the Strait of Hormuz

Qatar is one of the world’s largest LNG exporters, shipping around 81 million tons per year of liquefied gas. Qatar’s reliance on the Strait of Hormuz for the export of its entire LNG production is almost absolute. Unfortunately, unlike oil, which has some alternative pipeline routes, there are currently no practical or ready-to-use alternative pipelines for transporting Qatari LNG away from the Strait of Hormuz.

This means any closure of the Strait would immediately and directly cut off these enormous supplies from global markets, leading to an immediate and severe global shortage of gas. This deficit, in turn, would trigger skyrocketing spot gas prices, directly harming the energy and industrial sectors in importing countries and significantly increasing electricity generation costs worldwide.

Impact of Strait Closure on Oil Prices

Should the Strait be closed or significantly disrupted, the impact on oil prices would be immediate and severe. Iraq alone exports around 3.37 million bpd via the Strait, alongside 1.57 million bpd from Kuwait, 0.37 million bpd of crude oil from Qatar, and 0.15 million bpd from Bahrain. This means a closure would instantaneously cut off over 5.46 million bpd of crude oil from these four nations. Estimates suggest this massive supply deficit could drive oil prices to $150 per barrel or even considerably higher, compared to current Brent prices hovering around $77 per barrel.

Oil Price Stability

Despite the alarming scenario of a Hormuz closure, markets haven’t fully priced in this catastrophic risk, with current prices remaining around $77 per barrel. Several key factors contribute to this perceived stability:

• Record US Oil Production: The United States, the world’s largest crude oil producer, has maintained exceptionally high production levels. In 2024, US crude oil production averaged around 13.2 million bpd, with forecasts predicting a rise to approximately 13.7 million bpd in 2025. This massive output, fueled by the shale revolution, provides significant flexibility in global supplies and lessens reliance on Middle Eastern sources, even if the US remains a net importer for some of its needs.
• Strategic Reserves as a Safety Net: Member countries of the International Energy Agency (IEA), comprising major consumers, are mandated to hold strategic oil reserves equivalent to at least 90 days of their net imports. Collectively, these reserves are estimated at around 1.5 billion barrels. The United States alone, for instance, maintains its Strategic Petroleum Reserve (SPR), which currently holds approximately 367 million barrels (as of late May 2025). While not a long-term solution, these substantial reserves offer a crucial buffer to compensate for any immediate supply disruption, buying time for markets and consuming nations to adapt and respond.
• Weak Global Demand: A noticeable slowdown in global economic growth, particularly in major economies like China and Europe, contributes to softer oil and gas demand. Weak economic data, persistent inflation, and tight monetary policies (high interest rates) curb industrial and commercial consumption, alleviating upward pressure on prices even amidst geopolitical tensions.
• Impact of the Green Economy and Energy Efficiency: While the green economy and energy transition don’t fully replace oil and gas, they are increasingly instrumental in curbing global fossil fuel demand growth. Rising investments in renewable energy and improved energy efficiency in industries and transportation reduce marginal oil demand. Some reports estimate that advancements in energy efficiency and the proliferation of electric vehicles could save the equivalent of several million barrels per day of future oil demand compared to previous projections, thus limiting upward price pressure in the medium term.

Gold Prices, Global Financial Markets, and the US Dollar

In a Hormuz closure scenario, global financial markets would undoubtedly experience turmoil, though certain factors might mitigate its severity:

• Gold as a Safe Haven Surges: Investors would quickly flock to safe-haven assets, leading to a record surge in gold prices. The report projects that the price per ounce could exceed $3400, with potential for even higher levels if global uncertainty escalates. However, the dollar’s liquidity and the perception of risks as short-term might cap the most extreme price surges.
• Global Market Index Decline: Stock market indices worldwide would experience sharp declines in a widespread sell-off, fueled by growing fears of economic slowdown and rising corporate operating costs. Yet, rapid government responses and existing financial reserves could limit the depth of the downturn.
• US Dollar Volatility: Initially, the US dollar might strengthen as a temporary safe haven. However, broader global economic repercussions, especially the inflationary impact of soaring oil prices on the US economy itself (via inflation and import costs), could lead to subsequent violent fluctuations in the dollar’s value, potentially weakening its global standing if the crisis is prolonged.
• Global Banking Sector: The global banking sector would face immense pressure. Soaring energy prices and inflation would negatively impact the ability of companies and individuals to repay loans, increasing the risk of non-performing loans. Furthermore, declining financial markets would threaten the stability of banks’ and financial institutions’ investment portfolios, potentially leading to liquidity shortages and increased interbank borrowing costs. Any significant disruption to international trade and energy flows would heighten credit risks on a global scale, possibly necessitating intervention from central banks to ensure financial stability.

A Serious Risk, Not an Absolute Catastrophe

• US Economy: Although the United States is a major oil producer, an oil price surge to $150 per barrel would fuel runaway inflation, driving up production and transportation costs across supply chains, potentially pushing the US economy into a severe recession. However, substantial domestic production and reserves offer greater resilience than in the past.
• Chinese Economy: China, the world’s largest oil and gas importer, heavily relies on Middle Eastern supplies. A Hormuz closure would deliver a crippling blow to its industry and domestic consumption, potentially leading to a significant economic slowdown or even contraction, with global ripple effects on supply chains. Nevertheless, China possesses large reserves and the ability to negotiate urgent supply deals.
• European Economy: Europe heavily depends on LNG to compensate for reduced Russian gas supplies. A Hormuz closure would trigger a severe energy crisis, supply shortages, and hyper-inflated energy costs, deepening existing economic woes and increasing recession risks. Yet, investments in the green transition and expanding import capacities from the US and Australia might offer some flexibility.
• Impact of Hormuz Closure on Gas-Importing Economies: Economies heavily reliant on Qatari LNG imports, such as Japan, South Korea, China, India, and most European Union countries, would be the most directly and immediately affected.
  These nations would face:

1- Severe Energy Crisis and Supply Shortages: The cutoff of 20-25% of global LNG supplies would create a massive gap that cannot be quickly compensated.

2- Record Increases in Energy Bills: Businesses and households would face unprecedented surges in energy costs, negatively impacting purchasing power and significantly increasing industrial production costs.

3- Disruption of Major Industries: Gas-intensive industries, such as petrochemicals and fertilizers, face severe difficulties, potentially leading to reduced production or factory closures, affecting global supply chains.

4- Exacerbated Inflation and Slower Growth: The sharp rise in gas prices would significantly fuel inflationary pressures in these economies, threatening recession or exacerbating existing economic downturns.

• Global Economic Growth: Collectively, these repercussions would lead to a significant deceleration in global economic growth, potentially pushing it into a deep global recession that would be challenging to recover from in the short to medium term. Nevertheless, the market’s adaptability and swift international responses could prevent an absolute collapse, though at a considerable cost.

Limited, Costly, Yet Mitigating the Shock:

While some alternatives exist, they are highly limited and insufficient to fully compensate for the massive volumes of oil and gas transiting Hormuz. Nevertheless, they play a vital role in mitigating the immediate shock:

• Alternative Oil Pipelines:

– Saudi Arabia’s East-West Pipeline (Petroline/Abqaiq-Yanbu): Has a maximum capacity of about 5 million bpd.
– UAE’s Habshan-Fujairah Pipeline (ADCOP): With a capacity of approximately 1.5 million bpd.
– Iraq-Turkey Pipeline (Kirkuk-Ceyhan): If fully reactivated, its operational capacity is around 1.6 million bpd for northern Iraqi crude.

These pipelines combined could theoretically provide up to 8 million bpd of crude oil bypassing the Strait. This falls significantly short of the 17-20 million bpd typically passing through Hormuz and does not address LNG shipments.

• Strategic Petroleum Reserves: As mentioned, IEA reserves of 1.5 billion barrels and the US SPR of 367 million barrels provide the capacity to supply the market for several weeks or months, reducing the immediate shock and allowing for response time.
• Increased Production from Other Regions: The United States (shale oil) and other countries could increase production, but this would take time and would not fully compensate for an immediate, large-scale shortage.In conclusion, The international community needs to act urgently and in a coordinated manner to ensure the stability of global energy supplies. While the closure of the Strait of Hormuz might not necessarily lead to an absolute catastrophe, thanks to increasing market flexibility and available reserves, the global economic and social cost of any disruption to this vital waterway would still be immense. This necessitates concerted diplomatic and security efforts to avert serious repercussions for the global economy.