The Strait of Hormuz on a map. Robert - stock.adobe.com

When President Trump briefed Republican lawmakers at his Doral golf club on 9 March, he called the US-Israeli military campaign in Iran a ‘little excursion’ to ‘get rid of some evil.’ Weeks later, that ‘little excursion’ had reshaped the global order. Shipping, oil and insurance are all in crisis with warnings that the global economy is likely to be severely impacted.

The US-Israel alliance started their massive strikes on Iran on 28 February. Four days later, Tehran began a de facto closure of the Strait of Hormuz. The 21-mile-wide passage through which 20 per cent of the world’s petroleum once flowed is now a desolate front line that threatens to upend the global economy.

The attacks have led to an unprecedented situation for the world’s most prolific oil producers in the Persian Gulf. With the exit door bolted shut, storage tanks in Kuwait, Qatar and the UAE have reached maximum capacity. The International Energy Agency says global oil markets are facing a historic supply disruption, pushing up prices for consumers, creating the ‘greatest global energy security challenge in history.’ The war has also damaged or destroyed 30 to 40 per cent of Gulf oil refining capacity, the industry that produces petrol, diesel and jet fuel, leaving an 11-million-barrel-a-day hole in global markets. Israel and the US targeted Iran’s Pars gas field, which provides over 70 per cent of Iran’s gas and its main regional export leverage.

The impact splits Western-aligned Gulf producers into two camps. Saudi Arabia and the UAE continue exporting thanks to alternative pipelines to Yanbu on the Red Sea and Fujairah on the Arabian Sea. But even with some flow via the East-West Pipeline, Riyadh cannot replace the seven million barrels a day that normally transit Hormuz. Abu Dhabi National Oil Company, the UAE’s state-owned energy giant, has boosted output to Fujairah via its bypass pipeline but total regional bypass capacity tops out at roughly six million barrels a day.

Iraq, Kuwait, Qatar and Bahrain lack those workarounds and have slashed production. On 7 March, the Kuwait Petroleum Corporation took the unprecedented step of declaring force majeure, cutting output after running out of storage. Production at Qatar’s Ras Laffan, the world’s largest liquefied natural gas export facility, has ground to a halt. The loss of Qatari gas alone has already pushed European energy prices up 20 per cent.

‘When Hormuz is squeezed, the pressure is immediately felt around the world. In just three weeks, the price of oil has risen by 50 per cent,’ said Sultan Ahmed Al Jaber, the chief executive of the Abu Dhabi National Oil Company, in public statements. ‘This is raising the cost of living for those who can least afford it and slowing economic growth everywhere. Stability in energy markets underpins security in every market. Energy security is the difference between lights on and lights off.’

Insurance paralysis at sea

The crisis has hit many sectors. Analysts say that the maritime insurance sector has been particularly hard hit. Iran shifted from a formal blockade to a strategy of ‘calculated uncertainty,’ asserting dominance by making maritime insurance nearly unattainable. Major insurers have pulled back war-risk coverage for Gulf transits or sharply restricted it. Premiums have surged from roughly 0.2 per cent of a vessel’s value to as high as 1 per cent. For a $100m tanker, that adds $1m in insurance costs for a single voyage. The result is a de facto closure driven not only by formal blockade but also by market forces, which in this case prove even more effective. Analysts say the industry is facing a ‘breaking point’.

Rafael Fernández, Senior Vice Chair of the IBA Insurance Committee, says the private insurance market is struggling to absorb the mounting risks. This is leading to a potential breakdown in global shipping logistics. Marine war-risk premiums have surged to ‘commercially unviable’ levels. Without affordable coverage, vessels fall into breach of financing covenants and charter contracts, a cascading legal crisis that paralyses operations, he says.

‘Where insurers withdraw capacity entirely, shipowners face a serious legal problem: uninsured vessels simultaneously breach their financing covenants and charter obligations, effectively paralysing their operations,’ Fernández told Global Insight.

And that does not even count if Iran finally establishes total dominance in the region. That will trigger a complete withdrawal of private political-risk underwriting, ending the era of private maritime insurance in the Gulf and forcing a shift to government-backed schemes and a permanent re-evaluation of war-exclusion clauses in global policies. ‘Full control of the Strait would almost certainly trigger a complete market withdrawal of privately underwritten political risk cover, potentially forcing involvement of governments,’ Fernández says. ‘This may result in a transfer of risks to other solutions supported by the state and a potential disruption of existing insurance and contractual arrangements in international shipping.’

But, even a US government response has already faced scepticism. A $20bn maritime insurance facility launched by the US International Development Finance Corporation in early March failed to cover the liability and pollution risks that currently keep most global tankers at anchor, as it focused more on machinery and hull.

Industry bodies, however, say that insurance is available but only ‘at the right price’ and that safety was actually the bigger issue. The Lloyd’s Market Association, the trade body representing underwriting businesses in the Lloyd’s of London market, headlined their statement on the issue: ‘Safety concerns, not insurance availability, driving reduced vessel traffic in the Strait of Hormuz.’

The impact shifted quickly from the petrol pumps to the global economy. Analysis from West Point’s Modern War Institute warns that the US defence industrial base is at risk from the closure. The Strait handles 50 per cent of the world’s seaborne sulphur trade, a critical input for extracting copper and cobalt used in microprocessors and munitions. The sulphur shock has already pushed fertiliser prices up 165 per cent year-on-year, raising the spectre of a global food crisis.

The International Monetary Fund (IMF) warned on 31 March that the conflict was delivering an asymmetric global shock while UNCTAD warned of a scenario similar to the Ukraine war and Covid-19, where ‘disruptions to energy, transport and agricultural inputs can quickly spread across interconnected markets.’ Around one-third of global seaborne fertiliser trade (about 16 million tonnes) passes through the strait, raising concerns about fertiliser access for some of the poorest countries. Northern Hemisphere farmers stocked up before the conflict began, meaning the worst food price shocks may not arrive until the next planting season. For now, the developing world is bearing the brunt.

Furthermore, for energy importers, the price surge acts as a sudden tax on income that erodes purchasing power and threatens a new era of stagflation: the toxic mix of stagnant economic growth and high inflation. ‘Parts of the Middle East, Africa, Asia-Pacific and Latin America face the added strain of higher food and fertiliser prices and tighter financial conditions,’ the IMF said.

Future of the Strait

As of 8 April, the Strait of Hormuz was set to reopen. But not on the old terms. Under a ceasefire brokered by Pakistan, Iran has agreed to grant selective passage for at least two weeks. The deal came together after Trump announced a pause in military action, conditional on Iran restoring safe transit. Israeli operations in Lebanon are excluded from the pause, but the broader conflict has gone quiet at least for now.

The real issue, however, is what Iran has locked in during the crisis. Its parliament has plans for a bill to impose a toll system on vessels transiting the strait, technically a state-managed tollbooth expected to charge $2m per ship. JP Morgan estimates that clearing the roughly 2,000 to 3,000 vessels currently stranded inside the Gulf could generate $4bn to $6bn for Tehran’s post-war reconstruction. That rivals the annual toll revenues of the Panama and Suez Canals.

Iran proposed the toll clause during ceasefire negotiations and Trump has hinted there could be ‘financial gains’ from the arrangement. Negotiations for a permanent end to the war were scheduled for 11 April in Islamabad. The Strait of Hormuz has reopened, in theory, but the war has fundamentally changed the terms of its operation.

Emad Mekay is a freelance journalist and can be contacted at emad.mekay@int-bar.org