Iran’s threat to burn ships is choking off Persian Gulf oil flow to world

BEIRUT — When Iran’s Islamic Revolutionary Guard Corps warned this week that ships passing through the Strait of Hormuz would be “set on fire,” alarm was raised among government and industry leaders around the world.

They have good reason to panic: Whoever controls the strait controls nothing more than being the only sea gateway to the world for most of the Persian Gulf’s oil riches. Shipping companies are already taking Iran’s warning into account.

Here’s a closer look at the strait and how the US-Israeli war against Iran will have effects far beyond Iran’s borders.

Why is the Bosphorus important?

Located between the southern coast of Iran and a peninsula shared by Oman and the Emirates, the strait is a small stretch of sea connecting the Persian Gulf to the Oman Sea.

It is approximately 100 miles long and only 21 miles wide at its narrowest point. It has two 2-mile-wide shipping lanes separated by a 2-mile-wide median, allowing traffic in opposite directions.

However, its small size belies its importance.

On any given day, an armada of about 80 tankers loaded with roughly 16 to 18 million barrels, or about one-third of all oil transported by sea, transits the waterway, delivering about 20% of the world’s crude oil and a large portion of the gas.

But the importance of the throat goes beyond energy. It manages a significant amount of container traffic with the Gulf countries, which are an important hub for containers bringing consumer goods from Asia to Europe.

What was the reaction to Iran’s warning?

Experts and maritime traffic monitoring services say that, with the passage of ships almost completely stopped, the Bosphorus has actually turned into a parking lot.

“Tanker traffic is down about 90%. And there are still loaded oil tankers waiting outside of Hormuz that don’t want to go through to global oil markets,” said Noam Raydan, a maritime risk expert at the Washington Institute for Near East Policy.

Shipping industry leaders also said about 10 percent of container ships operating worldwide were stranded in the strait, while the United Kingdom’s Merchant Marine Operations, which monitors safety at sea, said in an advisory note on Thursday that only two cargo ships had passed in the previous 24 hours. The UK group said this was well below the historical average of 138 per day and represented “an almost complete temporary halt to routine commercial traffic”.

On Thursday, Danish shipping giant Maersk suspended new cargo bookings to several ports in Saudi Arabia, the UAE, Kuwait, Qatar, Iraq and Oman “until further notice.”

Other shipping companies, including Hapag-Lloyd and Cosco Shipping, have taken similar measures. Mediterranean Shipping Co. announced it will impose fuel surcharges on shipping customers through April.

Maersk added in a statement that “exceptions will be made for critical foodstuffs, pharmaceuticals and other essential products.”

Although Iran has not formalized the shutdown (the ban was announced on national television by a Revolutionary Guard representative), its threats have proven effective.

At least nine ships have been hit by shells since U.S. and Israeli strikes against Iran began on Feb. 28, according to Lloyd’s list on Thursday; Iran claimed responsibility for most of the attacks that killed three sailors and two dock workers.

Meanwhile, insurers are withdrawing coverage.

What is the impact on prices?

We are already seeing an increase in the shipping industry, with tanker charter rates rising from $100,000 to $400,000 per day; Observers say some companies are talking about going as high as $700,000.

These increases were also reflected in the energy markets; jet fuel was hit the hardest, potentially leading to an increase in ticket prices later in the year. Meanwhile, the price of Brent oil rose above $90 on Friday, an increase of 7% compared to the previous day and 24% since the beginning of the war.

However, the market’s response has been relatively weak, said David Butter, a Middle East energy expert at the Chatham House think tank.

“The way prices are going, there seems to be a reaction in the market based on the expectation that things will shut down in a few weeks,” Butter said. He added that the large amounts of oil stored in land depots or hundreds of tankers floating in the strait serve as a kind of return point.

However, it is unclear how long this return will last. Many Persian Gulf countries have already reduced or completely halted oil and gas production out of fear of attack by Iran’s drone or missile arsenal. Experts say it could take weeks to restart production.

Robin Mills, managing director of consultancy Qamar Energy in Dubai, said there was a disconnect between the price and the geopolitical situation.

“It’s been surprisingly relaxed, given what’s going on. I would say it’s been relaxed in the wrong way,” Mills said.

He compared the market disruption to a rise in prices to $120 a barrel at the start of Russia’s attack on Ukraine in 2022.

“This is much more serious and the long-term consequences could be much worse, but still the price has slowly increased.”

Qatari Energy Minister Saad Al-Kaabi told the Financial Times that oil prices could reach $150 per barrel, depending on how long the war lasts.

“Global GDP growth will be affected,” he said. “Energy prices for everyone will rise. There will be shortages of some products and factories not being able to supply will cause a chain reaction.”

What does Trump do in response?

This week, President Trump said the U.S. government could offer insurance to commercial ships and provide U.S. Navy escorts to keep traffic moving.

At least part of that plan has come true: On Friday, the U.S. International Development Finance Corporation announced it would insure up to $20 billion in losses for oil tankers and other maritime traffic.

But Mills said many shipowners would not be interested in putting ships at risk, with or without insurance.

“They don’t want ships to be damaged, crews to die, or ships to be stranded,” he said. He added that there are doubts about whether the Navy can truly protect shipping.

“Are there enough ships to escort every ship?” he asked. “And they’re fighting a war right now, so they might not be available.”

In his messages, Trump was characteristically brash. In an interview with Reuters on Thursday, he appeared indifferent to the rise in gas prices.

“When this is over, they’re going to fall very fast, if they go up, they go up,” he said.

“But this is much more important than just slightly increasing gas prices.”