Iran’s potential blockade of the Strait of Hormuz: Global and South Asian economic fallout

KATHMANDU: Tensions in the Middle East have escalated following Iran’s reported threats to block the Strait of Hormuz, a critical maritime chokepoint through which approximately 20% of the world’s oil and 30% of liquefied natural gas (LNG) transit daily.

This narrow waterway, connecting the Persian Gulf to the Gulf of Oman, is a lifeline for global energy markets, with an estimated 20 million barrels of oil per day flowing through it in 2024. A blockade by Iran, as suggested by recent statements from Iranian officials amid heightened conflict with Israel and U.S. involvement, could trigger a seismic economic shock, with particularly severe consequences for South Asia’s energy-dependent economies.

The Strait of Hormuz, just 33 kilometers wide at its narrowest point, is vulnerable to disruption due to its geographic constraints and Iran’s military capabilities, including missiles, drones, and naval mines.

A closure would halt shipments from major oil producers like Saudi Arabia, the UAE, Kuwait, Iraq, and Qatar, which collectively account for a significant portion of global crude exports. The International Energy Agency (IEA) estimates that only 4.2 million barrels per day could be rerouted via alternative pipelines, such as Saudi Arabia’s East-West Pipeline or the UAE’s Fujairah route, leaving a shortfall that would spike global oil prices.

Analysts project Brent crude could soar to $120-$150 per barrel, potentially surpassing the 2008 record high, fueling global inflation and supply chain chaos.

For the global economy, the consequences would be dire. A prolonged disruption could mirror the oil shocks of the 1970s, with Deutsche Bank warning of a potential drop in global growth akin to crises in 1973, 1990, or 2022.

Energy-intensive industries, from manufacturing to transportation, would face skyrocketing costs, while consumers would bear the burden of higher fuel and electricity prices. Europe, reliant on Qatari LNG and Middle Eastern oil, could face energy shortages, exacerbating inflation and straining post-pandemic recovery efforts. Even a partial blockade, with Iran targeting specific vessels, could elevate insurance premiums and shipping costs, further disrupting global trade.

South Asia, particularly India, Pakistan, and Bangladesh, would be among the hardest hit. These nations rely heavily on Gulf oil and gas, with 84% of Hormuz’s crude and condensate flows in 2024 destined for Asian markets, including 69% to China, India, Japan, and South Korea. India, importing over 80% of its oil, much of it through the Strait, would face immediate economic strain.

A price surge to $150 per barrel could inflate India’s import bill by billions, weakening the rupee and driving up inflation. Fuel subsidies, a significant fiscal burden, would strain government budgets, potentially forcing cuts to social programs. Pakistan and Bangladesh, already grappling with economic fragility, would face similar challenges, with rising energy costs threatening industrial output and exacerbating poverty.

Beyond economics, a blockade could destabilize South Asia’s geopolitical landscape. India’s strategic partnerships with Gulf nations, crucial for energy security, could be tested as regional powers like Saudi Arabia and the UAE pressure for intervention. Pakistan, with closer ties to Iran, might face diplomatic dilemmas, balancing economic reliance on Gulf imports with regional alliances. Smaller South Asian nations, lacking the infrastructure to absorb such shocks, could see supply chain disruptions ripple into food and commodity shortages, given the Strait’s role in global container trade.

Iran itself would not escape unscathed. Closing the Strait would choke its own oil exports, which account for 65% of government revenue, risking economic collapse and domestic unrest. China, Iran’s largest trading partner, would likely exert significant pressure to prevent such a move, as it relies heavily on Gulf oil. Military retaliation from the U.S., with its Fifth Fleet stationed in Bahrain, could swiftly escalate the conflict, further destabilizing the region.

While a full closure remains a low-probability scenario due to these mutual risks, the mere threat has already rattled markets, with Brent crude rising 13% last week. As Iran weighs its options, the world watches anxiously, aware that any disruption in the Strait of Hormuz could reshape the global economic order, with South Asia standing at the precipice of a particularly acute crisis. From agencies