CATACLYSMIC CRISIS THREATENS GLOBAL ECONOMY
Potential Iranian Closure of Strait of Hormuz Implications for Russia's Economic Interests
The potential for U.S. military intervention leading to a war between Israel and Iran looms, bringing unprecedented danger to the strategic Strait of Hormuz. A vital artery for energy trade worldwide, the strait's political and economic instability can significantly influence oil prices and the global economy as a whole.
This narrow passageway (39-96 km wide) and 195 km long links the Persian Gulf to the Oman Sea, offering access to the open ocean. An astonishing third of the world's liquefied natural gas and nearly a quarter of oil pass through it. Among the countries utilizing this route for energy exports are Iran, Iraq, Saudi Arabia, UAE, Kuwait, Qatar, and Bahrain.
A GLOBAL ECONOMIC NIGHTMARE
- If the strait is closed, oil supplies to the world market would be halted, leading to a massive oil deficit and soaring prices – possibly reaching $150 to $200 per barrel, according to Igor Yushkov, a prominent expert at the Financial University under the Russian government and the Fund for National Energy Security, in an interview with KP.RU. - Such a scenario would ignite a global economic crisis, causing consumption to plummet to stabilize prices. However, few can afford to pay exorbitant energy costs, leading to a decrease in demand to around $100 per barrel.*
Many major economies, including China and India, will feel the burn, believes Yushkov. The U.S. will also experience the negative fallout due to the direct connection between fuel prices and domestic prices, making gasoline dramatically more expensive. This poses a risk for Trump, as American citizens tend to blame the current administration when fuel prices rise.
- Yet, Russia finds itself in a peculiar position. In the short-term, a closure won't affect our ability to supply oil, giving us a temporary financial boost. However, long-term, it's strategically unfavorable because high prices won't last and will decrease consumption on our markets, causing a decrease in oil sales. Sustaining and restoring these markets would take time and effort.*
In light of these potential challenges, Russia has expressed satisfaction with the current status quo. Oil prices currently hover around $81 per barrel of Brent oil. While Russia would prefer higher prices to prevent demand from falling, it is content as long as they remain below $100 per barrel. Furthermore, a possible reduction in Iran's oil supplies to China gives us additional leverage in our negotiations with the Middle Kingdom on joint projects.
But will it come to the closure of the strait? According to Yushkov, it's an unlikely scenario.
- Iran may not block the strait, as doing so risks reducing its oil exports, especially to China - its largest source of income. Furthermore, Iran requires funds to sustain the conflict and can't afford to jeopardize this essential revenue stream. Additionally, Iran understands the power imbalance between the U.S. and itself.
- If the strait is blocked, it will undoubtedly prompt stronger U.S. military action, such as attempts to unseat the Iranian regime or eliminate its political leadership. Iran is fully aware of the potential consequences and will take steps to avoid such a dangerous situation. In fact, public discussions concerning the strait are signals that Iran seeks a trade-off, including support in preventing actions against Israel, negotiating a nuclear deal, or lifting sanctions.*
Ultimately, the point of no return hasn't been reached yet. However, if serious strikes against Iran's leadership or oil facilities are initiated, depriving Iran of vital income, then it could choose to block the Strait of Hormuz as a last resort.
- The potential closure of the Strait of Hormuz could lead to a global economic crisis, as an astonishing third of the world's liquefied natural gas and nearly a quarter of oil passes through it.
- Many major economies, including China and India, will feel the effects of such a crisis due to their reliance on oil exports from countries such as Iran, Iraq, Saudi Arabia, UAE, Kuwait, Qatar, and Bahrain.
- Although Russia could initially benefit financially from a closure due to its temporary inability to affect oil supplies, it would face long-term strategic disadvantages, including decreased consumption on its markets and reduced oil sales.
