Are Strait of Hormuz tensions endangering trade?

The impact of ongoing geopolitical tensions in the Strait of Hormuz is already being felt in the cruise industry and could spill over to wider trade if oil prices are affected

A narrow stretch of water less than 100 miles long and 21 miles wide at its narrowest point is currently the focus of intense efforts led by the United States aimed at protecting trade and security in the Gulf region.

The Strait of Hormuz, bounded by Iran, Oman and the United Arab Emirates (UAE), connects the Gulf with the Arabian Sea. The waterway is a key shipping route for oil tankers as approximately one fifth of the world’s oil traffic, nearly 21 million barrels a day, passes through the strait.

The channel is equally important to the logistics industry with large numbers of container ships transporting cars, white goods and food to Jebel Ali in Dubai, the busiest port in the Middle East.

Strait of Hormuz a microcosm of US-Iran tension

In recent months, America and Iran have been engaged in brinkmanship in the aftermath of the US withdrawal from the Iran nuclear deal in May 2018. US President Donald Trump’s withdrawal from the deal was followed by renewed sanctions and a new “maximum pressure” strategy on Tehran, which almost culminated in a US air strike on Iranian military targets in June.

The situation has become a microcosm of worsening US-Iranian relations. In July, authorities in Gibraltar and British Royal Marines detained an Iranian tanker on suspicion of carrying crude oil to Syria, in breach of European Union sanctions. Just weeks later, Iranian authorities seized a British-flagged oil tanker.

Then, earlier this month, Iran’s Islamic Revolutionary Guards seized an Iraqi oil tanker in the Gulf on suspicion of smuggling fuel. The tanker was reportedly carrying around 700,000 litres of fuel.

“When you look at strategic choke points, the Strait of Hormuz matters most in terms of international stability,” says Professor Anoush Ehteshami, joint director of the Centre for the Advanced Study of the Arab World at Durham University. “The crucial element here is its strategic place, which you cannot over-emphasise enough.

“In the case of the strait, there is clear distrust and hostility among the neighbour states. Iran claims monopoly over its security, which means there are significant structural problems the Strait of Hormuz faces. There is no consensus over what a collective approach to its security might look like and countries like Saudi Arabia and the UAE are suspicious of Iran.”

Impacting trade, travel and tourism

The escalating tensions have also impacted ancillary trade sectors such as travel and tourism across the Gulf region. Last month, P&O Cruises announced it will temporarily withdraw from Dubai amid continuing tensions over shipping. P&O says it has cancelled its Dubai and Gulf schedule from October until at least March.

The announcement impacts Dubai which recently released new cruise season figures for 2018-19 which showed a record 51 per cent increase in cruise tourists over the period. Dubai’s main Mina Rashid Cruise Terminal welcomed around 850,000 cruise visitors on 152 ships during the year compared with some 560,000 and 110 ships the previous year.

Other international cruise liners, meanwhile, say they will continue to operate in the region. British operator Cunard Line says its flagship vessel Queen Mary 2 plans to dock in Dubai in 2020.

“Escalation of the current situation can be traced back to June when the US was about to strike targets in Iran,” says Professor Scott Lucas of the Department of Political Science and International Studies at the University of Birmingham. “Trump immediately flipped when planes were four hours away from their targets and ships had moved into position.

The crucial element here is the Strait of Hormuz’s strategic place, which you cannot over-emphasise enough

“What you have now is that even if you don’t go to a military confrontation, you have a position where you have a political and economic fight to force the surrender of one side. The US isn’t going for regime change, but wants to break the economy which would set the conditions for regime change. In response, what Iran is trying to indicate is that the Strait of Hormuz is not only their backyard, but everyone should stay out. They’re saying they don’t want not only Americans to stay out, but also the British and anyone else.”

Will crisis force up global oil prices?

While the US-led mission in the strait currently partners only with the UK and Bahrain, Australia recently announced a small group of its armed forces will make a “modest, meaningful and time-limited” contribution to the mission. Prime minister Scott Morrison says 15 per cent of crude oil and 30 per cent of refined oil bound for Australia passed through the strait. Australia would send forces to the Middle East to counter “destabilising behaviour”, he says.

Following the recent spate of maritime incidents in the Gulf of Oman and the Strait of Hormuz, the International Bargaining Forum designated the waters as a temporary extended risk zone, which means seafarers who are attacked in the zone are temporarily entitled to a bonus and a doubling of compensation covering death and disability.

In the coming months, analysts stress an increase in oil prices if the current crisis is not de-escalated through diplomacy. “The biggest problem with the current strategy is it has not provided a safety valve and left Iran no option but to escalate,” says Professor Ehteshami. “At the moment, I think it will remain in a kind of cold-war conflict so oil prices will remain where they are. But an unforeseen escalation in the crisis where there is exchange of shots would see oil prices react.

“More recently, the UAE is gently stepping away from the hard line the Saudis have been advocating, which is providing Iran with a ladder to step down from.”

Others argue next year’s US election may prompt some new diplomatic initiatives. “Trump does not want a war with the 2020 election approaching, but also cannot afford to climb down,” says Steffen Hertog, associate professor of comparative politics at the London School of Economics. “I would not exclude a North Korea-type grand gesture, but it would be difficult for Trump to pull this off given the longer path of escalation and the more deeply ensconced anti-Iranian forces in and around the US administration.”