The financial impacts of a conflict with Iran
The current conflict in the Middle East has brought renewed attention to the Strait of Hormuz, a crucial shipping route for global oil supplies. The Houthi militia, allegedly backed by Iran, has reportedly managed to deter almost all shipping from exiting the Red Sea, raising concerns about potential disruptions to oil flow.
In response to U.S. strikes, Iran has threatened to close the Strait of Hormuz, a move that could significantly impact the world's oil market. This is not the first time such a threat has been made - Iran has previously threatened to close the strait during conflicts with Israel.
Iran is responsible for approximately 3-4% of global oil production, and about one fifth of all global oil supply passes through the Strait of Hormuz. However, it's important to note that the U.S. is more insulated from oil disruption than other countries.
Iran's ability to carry out such a closure might have been significantly weakened. Reports suggest that Trump's assassination of Iranian general Qasem Soleimani in 2020 had similar consequences, with tankers scrambling to leave the area due to the risk of attack.
Despite having a vast and diverse array of weapons, Iran's actions in this conflict have been relatively limited. So far, the best Iran has been able to do is to kill a few dozen Israeli civilians.
Russia, traditionally a key ally of Iran, is too preoccupied with its war in Ukraine to offer significant support. China, on the other hand, maintains a supportive stance towards Iran but has shown no interest in getting involved in wars outside its own neighborhood.
China is a major buyer of Iranian oil, with almost all of Iran's oil exports going to China. However, China is economically concerned about regional stability and potential disruptions like the Strait of Hormuz closure, which could harm its economy. As a result, China has adopted a cautious, largely neutral position in conflicts involving Iran and the U.S., seeking to avoid direct confrontation and economic fallout.
Iran's leaders are issuing dire threats against the U.S. in response to today's strike, but the likeliest outcome seems to be that the U.S. will conduct airstrikes until Iran's three nuclear facilities have been destroyed (if that isn't the case already), and then back off and leave the conflict to the Israelis.
Interestingly, Iran's allies, Russia and China, do not seem to be willing to come to Iran's aid in the current conflict. Only around a third of Iran's oil production is exported, with the majority remaining within the country.
In conclusion, the Strait of Hormuz remains a focal point in the ongoing Middle East conflict, with potential economic consequences heavily revolving around oil. The situation is fluid and complex, with various geopolitical factors at play.
