The Strait of Hormuz is now at the centre of Iranian and US calculus | US-Israel war on Iran
Tankers Attacked in Strait of Hormuz Amid Rising Tensions
On Tuesday, two tankers were reportedly attacked while navigating the Strait of Hormuz in Omani waters. Gulf nations swiftly condemned the actions and attributed blame to Iran. In response, the United States launched attacks on Iranian territory, prompting retaliatory strikes from Tehran targeting Bahrain and Kuwait. President Donald Trump announced that a memorandum of understanding between Iran and the U.S. is now void.
This recent escalation underscores the Strait of Hormuz as a focal point in the ongoing U.S.-Israel-Iran conflict that escalated on February 28. Disputes over the strait’s future have emerged as the most challenging issues in U.S.-Iran negotiations, overshadowing discussions regarding Iran’s nuclear program.
The interruption of traffic through the strait carries significant implications for Iran, its Gulf neighbors, and the global economy, which has been grappling with the largest oil supply disruption in modern history for over four months.
Iran’s Dilemma: Leverage and Liability
For Iran, control of the Strait of Hormuz represents a critical strategic advantage, albeit a costly one. Since the onset of the conflict, Iranian forces have mined the strait, targeted vessels, and reduced traffic by approximately 95 percent. The International Energy Agency has characterized this disruption as “the largest supply disruption in the history of the global oil market.”
The strait is vital for global energy, facilitating the transit of about one-fifth of the world’s oil and liquefied natural gas. Despite the capacity of Gulf pipelines, they cannot completely substitute for the strait’s output.
However, as Iran intensifies its restrictions, it inadvertently harms its own economy. The price of Iranian crude, previously discounted by $3 per barrel compared to international rates, has now risen to a 20 percent discount. Oil exports plummeted by over 90 percent in May as U.S. naval enforcement tightened constraints on Iranian shipping.
Prior to the conflict, the World Bank had projected a contraction in Iran’s economy by 2026. The ramifications of decreased oil sales could be profound, especially given a recent 60-day U.S. Treasury waiver allowing Iran to sell oil at market rates, which was rescinded following Tuesday’s attacks.
Iran’s insistence on asserting partial control over the strait, including proposing service charges for vessels, stands in direct conflict with U.S. positions asserting the legality of free transit passage under international law.
Impact on Gulf Nations
Gulf states, facing the consequences of a crisis they did not initiate, have begun adapting to the altered geopolitical landscape. Saudi Arabia has redirected some crude supplies through the East-West pipeline to the Red Sea port of Yanbu, while the UAE has relied on a pipeline to Fujairah along the Gulf of Oman. Nonetheless, these alternatives are limited, with their combined throughput far below the nearly 20 million barrels per day that historically traversed the Strait of Hormuz.
Both pipeline routes have also faced disruptions. Iranian attacks have reduced the East-West pipeline’s capacity by approximately 700,000 barrels daily, while drone strikes impacted operations at Fujairah. Consequently, seaborne crude exports from Gulf states, excluding Iran, halved between February and March.
Qatar, which hosts ongoing U.S.-Iran negotiations, is particularly invested in the resolution of this crisis, as its entire liquefied natural gas export sector relies on the Strait of Hormuz.
Oman, involved in claims over the strait’s territorial waters, balances its economic interests with legal obligations under the United Nations Convention on the Law of the Sea. Iraq, heavily reliant on Gulf terminals, is exploring alternative export routes to Turkey.
Global Economic Implications
The ongoing tensions have broader implications, primarily reflected through rising costs and insurance expenses. Oil prices have surged, affecting consumer goods and hampering economic growth. Projections indicate that the global economy may slow to 2.8 percent growth in 2026 from 3.4 percent in the previous year, largely due to disruptions at the strait.
Insurance costs for vessels transiting Hormuz, which previously averaged 0.25 percent of a vessel’s value, have increased dramatically to as high as 8 percent, creating significant financial burdens for shipping lines. Major shipping companies have introduced conflict surcharges, while the U.S. International Development Finance Corporation has intervened, offering up to $40 billion in reinsurance to facilitate maritime movement.
China, which relies heavily on imports from the strait and constitutes a major buyer of Iranian oil, is particularly vulnerable to these disruptions. Japan, reliant on 70 percent of its crude from the region, has begun utilizing strategic reserves to mitigate supply shortages.
For economies in Asia and Europe dependent on imports, the fate of the Strait of Hormuz is not merely a matter of diplomacy; it bears direct consequences on fuel and fertilizer prices. Additionally, approximately 30 percent of the world’s seaborne fertilizer trade passes through the strait, further complicating the crisis.
The World Bank has noted that fertilizer prices have risen more than 12 percent this year, creating supply shortages that could impact agricultural yields in food-insecure countries across Africa and Asia during the 2026–2027 growing season.
Ultimately, the ongoing standoff over the Strait of Hormuz presents a complex challenge. A resolution that merely reopens the strait without addressing its control risks recurring instability. Conversely, allowing Iran to levy transit fees could set a precedent that the U.S. and other shipping nations would find unacceptable. Until a comprehensive resolution is reached, the global economy remains precariously affected by the unresolved conflict in Hormuz.