Oil, China & The Strait Of Hormuz: The Economic Order Emerging From The Iran War

By SUSAN ESSEX

THE economic consequences of the Iran war reach far beyond the pump.

Higher fuel costs, rising shipping expenses and pressure on interest rates have affected households and businesses. Yet the deeper impact may lie in changes taking place inside the global energy system.

The conflict has altered assumptions about the security of the Strait of Hormuz. It has strengthened China’s position as a key force in global oil demand. At the same time, it has encouraged producers in the Americas and elsewhere to expand output.

Together, these developments could reshape the international oil market long after the fighting ends.

The Strait of Hormuz Is No Longer Just a Shipping Route

Few waterways matter more to the global economy than the Strait of Hormuz.

Before the war, its strategic importance was well understood. Around one-fifth of the world’s oil passed through the narrow channel every day.

What changed was not simply the volume of oil moving through the strait. The conflict changed perceptions about who could control that movement.

Iran claimed control over the passage after the United States and Israel attacked the country. Iranian forces targeted vessels entering or leaving the Persian Gulf, effectively restricting a route that carried millions of barrels of oil.

The disruption removed about 13 million barrels of supply from the global market.

That gave Iran something more powerful than a conventional military advantage: economic leverage.

From Closure Threat to Regulated Passage

Iran later changed its strategy.

Instead of maintaining a complete shutdown, Tehran established the Persian Gulf Strait Authority and introduced rules for vessels using the channel.

Ships had to register, follow designated routes and pay tolls.

The arrangement temporarily changed after Iran and the United States reached a memorandum of understanding that suspended tolls for 60 days. But tensions quickly returned.

The United States subsequently coordinated military escorts for nighttime passages by vessels described as “dark” transits.

Those escorts helped increase oil flows and reduce exposure to Iranian drone attacks.

Nevertheless, the operation came at a substantial cost.

It also demonstrated a new reality for the global economy: the world’s dependence on Hormuz now carries a more visible geopolitical risk.

Could Hormuz Carry a Permanent Price Tag?

The possibility of Iranian tolls has generated concern among countries that depend on the waterway.

Some critics fear that allowing Iran to charge for passage could encourage other governments to demand similar payments at strategic waterways.

Yet service charges already exist in several countries.

JPMorgan commodities analyst Natasha Kaneva has pointed to arrangements in Turkey, Denmark, Sweden, Russia and Indonesia that involve fees for services such as navigation, security and traffic management.

A similar Iranian model could add about $1 per barrel to oil prices, according to Kaneva.

For a very large crude carrier, the cost could reach about $260,000 for a round trip.

That may appear modest beside global oil revenues. However, repeated charges across millions of barrels could eventually influence prices throughout the supply chain.

China Turns Demand Into Strategic Power

The war also revealed the importance of China to the global oil market.

China’s advantage did not come from producing large quantities of crude.

It came from its ability to control its consumption.

Large stockpiles built before the conflict allowed Chinese buyers to reduce crude imports by about five million barrels per day.

That helped cushion the country from the supply disruption.

More importantly, the episode demonstrated that major consumers can actively influence the oil market by changing how much crude they purchase.

Electric Vehicles Strengthen the Shift

China’s transport sector provided another signal.

During the May Day holiday, highway EV charging increased 55.6 per cent compared with the previous year.

Almost one in four vehicles using Chinese highways during the holiday was electric.

The share represented a 33 per cent increase from the previous year.

Such figures matter because every shift from petrol or diesel to electricity reduces potential oil demand.

China also showed flexibility in electricity generation by switching from oil and gas to coal.

The move was environmentally controversial, but it demonstrated the country’s ability to respond quickly when an energy supply shock threatens the economy.

The Oil Market Learns to Live With Less

The global response to the disruption was even more significant.

JPMorgan estimates that the market lost around 1.9 billion barrels of Middle Eastern crude during the conflict.

Consumers and businesses absorbed nearly half of that loss by reducing oil consumption.

That result challenged the assumption that global economic activity must quickly restore lost oil demand.

Some of the reduction will probably prove temporary. Businesses may increase consumption when supplies become cheaper and more secure.

However, permanent changes in transportation, industrial efficiency and energy substitution could leave demand structurally lower.

China’s transition could accelerate that process.

If oil consumption continues to weaken, the industry could face an uncomfortable question: has the world moved closer to the peak of oil demand?

New Producers Fill the Gap

The supply response has been equally important.

Brazil increased output by about 800,000 barrels per day. Guyana added roughly 300,000. Canada and Norway contributed another 200,000 and 150,000 barrels per day respectively.

The United States also increased production by about 900,000 barrels per day from the previous year’s level.

These increases provide the global market with alternatives to Middle Eastern supply.

They also strengthen the bargaining position of producers outside OPEC.

Brazil’s performance has particularly surprised analysts. Continued expansion of offshore projects could allow the country to become an even larger player.

Guyana’s rapidly developing offshore industry could have a similar effect.

Middle East Looks for New Routes

Middle Eastern producers cannot simply wait for the Strait of Hormuz to become fully reliable again.

Saudi Arabia has already increased its use of alternative routes.

The country has used truck convoys to move supplies towards the Red Sea and maximised its East-West pipeline.

Iraq is considering a pipeline route to the Mediterranean.

Such infrastructure could reduce the region’s dependence on Hormuz.

It could also change future investment decisions.

Producers may increasingly judge projects not only by how much oil they can produce but also by how securely they can transport it to international markets.

OPEC’s Balancing Act Gets Harder

The changing supply picture presents another problem for OPEC.

The United Arab Emirates announced its departure from the group in April.

Iraq has also signalled frustration with production limits. Its government wants permission to raise output to five million barrels per day and eventually target seven million.

If Iraq pushes ahead, OPEC could face a difficult choice.

Allowing more production could lower prices and help consumers.

Restricting output could protect prices but frustrate members seeking greater production and revenue.

Either way, the possibility of an oil glut becomes more serious if global demand continues to weaken.

The End of the Old Energy Assumptions?

The Iran war has therefore produced more than a temporary energy crisis.

It has exposed the strategic vulnerability of Hormuz. It has shown that China can influence global oil markets through demand management. It has encouraged new production from countries far beyond the Middle East.

The consequences could persist even after the conflict ends.

Global energy security may increasingly depend on diversification: more production centres, more transport routes and more alternatives to crude oil.

For oil-consuming countries, that could reduce vulnerability to future supply shocks.

For traditional oil producers, however, the same transformation could bring lower prices, stronger competition and declining demand.

The war may eventually end.

The economic lessons it exposed are likely to remain.