Deep Dive: Why the Strait of Hormuz Could Break the Global Economy

Welcome back to the rundown for another weekend deep dive. Today we are talking about the straight of Hormuz. This narrow passage of water in the Middle East has been shut down and it could potentially bring down the global economy. Oil tankers are stranded, Middle Eastern countries have stopped production of oil and natural gas and prices are surging. So in today's episode we're going to break down why the straight of Hormuz actually matters so much, how this waterway has turned into a global economic pressure point and the potential impacts on the global economy if the straight is blocked for an extended period of time. We got a great one for you today. Let's dive in. Now before we get into the chaos let's start with the basics and take a look at geography. The straight of Hormuz sits between Iran to the north and Oman to the south. This waterway connects the Persian Gulf which is home to some of the largest oil-rich countries in the world to the Arabian Sea and the rest of the global shipping network. Countries like Saudi Arabia, Iraq, Kuwait, UAE, and Qatar ship oil and liquefied natural gas through this corridor. In fact nearly one of every five barrels of oil consumed on earth passes through this waterway. To give you some specific numbers according to the energy analytics firm Kepler roughly 13 to 15 million barrels of crude oil per day pass through the straight of Hormuz in 2025. That represents about 31% of all seaborne crude oil flows worldwide. But it's not just crude oil. 20% of the world's liquefied natural gas or LNG also moves through the straight every day mostly from Qatar. LNG is used for everything from heating homes to power generation to making fertilizer. So we're not just talking about gas prices at the pump being affected. So that's why the straight of Hormuz is one of the most important and closely watched choke points in the world. And right now the traffic through the straight has come to a standstill. Now to be specific here the straight of Hormuz is still open. It's not like there's like a naval blockade or anything. But tanker traffic is down roughly 90% from normal levels since the US and Israel first launched strikes on Iran about a week ago. Now at first many analysts thought this was because of an insurance issue. You know many insurance companies were pulling coverage for ships entering the region. But according to multiple reports insurance is still available. The problem is that it's just too dangerous for these tankers and crews to cross the straight. Since the war started about a week ago eight vessels have been struck. There's also reports of GPS jamming in the Persian Gulf which is disrupting ship navigation. So that's why the traffic is at a standstill right now in the region. According to Reuters roughly 200 vessels are currently waiting near major Gulf export terminals. Unsure on whether if it's safe to move through the straight or not. Now earlier this week President Trump said the US Navy would escort tankers through the region and that the US government would even provide insurance coverage. But there's no timeline for that. Plus there might not be enough naval ships. You know about a hundred tankers and cargo vessels pass through the straight daily during normal conditions. And that's why some companies and ships aren't waiting for things to calm down. At least three super tankers have already abandoned planned voyages to the Persian Gulf, rerouting instead towards the Atlantic Basin. And the giant logistics company Merisk which controls about one six of the global container fleet, suspended two of its container services through the straight. Now you might be wondering why can't these Gulf countries just bypass the straight? Well unfortunately the options are limited. Both Saudi Arabia and the UAE have pipelines that bypass the straight. But those alternative routes can only move about one third of the oil that normally flows through the straight of Hormuz. So that means that the straight of Hormuz continues to stay closed. A massive chunk of the global energy supply literally has nowhere to go and that is freaking out the markets right now. So how have oil markets responded to all this chaos? Well they're panicking right now. Before the US and Israel launched their strikes against Iran, crude oil was trading around $72 a barrel. Right now as I record this prices are over $90 a barrel. In fact crude oil prices have now gone up more than 50% in 2026. And depending on when you're watching this that number might be much higher. And some of the forecasts coming from Wall Street are pretty alarming. Goldman Sachs just raised their Q2 forecasts for international Brent crude oil. They said if volumes through the straight remain at the current levels for five more weeks, then Brent would likely hit $100 a barrel. Prices haven't been that high since Russia invaded Ukraine back in 2022. If you ask me that $100 price target might be conservative because we might hit that by Monday. According to the country of Qatar's energy minister, Saad Al-Khabi, he told the financial times that crude prices could hit $150 a barrel in the coming weeks if tankers can't pass through the straight of Hormuz. And he said that could bring down the economies of the entire world. And the thing is even if the war ended tomorrow, he warned that they could take weeks to months to resume normal exports. And speaking of Qatar, things are a lot worse for natural gas prices. New Qatar is one of the world's largest providers of LNG and they had to stop production on Monday at the Iranian drone's struck its facilities. Reuters reported that it might take at least a month to get back to normal production volumes even if conditions improve. And again, even if they're able to get back to peak production, if the street of Hormuz is blocked, there's no way for them to ship the product. So this is turning into a full-on crisis, and if you zoom out, the pain from this crisis isn't distributed equally. So let's talk about who's being impacted the most. The pain from this crisis will be felt more in some regions than others. Asia will likely get hit the hardest. About 80% of the oil and LNG that flows through the straight of Hormuz goes to Asian countries. That's why natural gas prices in Asia have literally doubled since last week. China might be one of the biggest losers here. They're the world's largest crude oil importer. And about 40% of the oil that China imports and 30% of its LNG imports pass through the straight of Hormuz. Not to mention China is also one of the biggest buyers of Iranian oil. They purchased over 80% of Iran's exports. So China is now exposed on multiple fronts here. Now China has been stockpiling oil at record levels, which gives them a bit of a buffer. But if this blockade for the straight of Hormuz drags on, the buffer will run out. And that's why according to multiple reports, China is in talks with Iran to allow oil and gas tankers to pass through the straight of Hormuz. And look, beyond China, other Asian countries are also exposed here in Japan, South Korea, India. They all rely on importing oil and natural gas from Middle Eastern countries. Europe is somewhat less directly exposed. They only import about 10% of their LNG from Qatar through the straight of Hormuz. But they are relying on getting jet fuel from these Middle Eastern countries. And that's why jet fuel prices have jumped about 75% since last week, which could make air travel more expensive in Europe. Let's talk about here in the US. The impact won't be as bad, the US is the largest producer of oil in the world, so they aren't depending on the oil coming from the Middle East. But here's the thing, oil is priced globally. So when crude prices spike, gas at the pump in the US goes up too. In fact, gas prices have already got out more than 25 cents a gallon since last week. So people are already starting to feel the pain at the pump. And the thing is, energy prices going up can have a cascading impact on the economy. So let's talk about it. All right, so now let's zoom out and talk about what the straight of Hormuz blockade means for the broader global economy because the ripple effects go way beyond just energy prices. Analysts are coming out with their projection on what they think could happen. The IMF's managing director said a 10% increase in energy prices that last for a year would add about 0.4% to global inflation and shade maybe 0.1 to 0.2 points off of GDP growth. Oxford economics had a jump to $100 an oil could add about 0.7% to global headline inflation. Goldman Sachs is estimating more of a modest impact. They think this could be a 0.1% drag on global GDP growth and a 0.2% percentage points boost to headline inflation under their baseline scenario. Now you might be thinking that these numbers sound pretty small, but you gotta remember central banks around the world have been fighting inflation for years now. In fact, the US Federal Reserve was just starting to get close to its 2% target and this oil shop could throw all that progress out the window and force the Fed to wait on cutting interest rates. On top of that, rising energy prices also impact business confidence. JP Morgan's chief global strategist David Kelly warned that when companies don't know what energy is going to cost next quarter, they pull back when hiring and investing in expansion. Energy is an input cost for basically everything. So when oil and gas prices go up, well then shipping and transportation prices go up and when shipping prices go up, well goods get more expensive and when things get more expensive, consumers tend to pull back on spending and when consumers pull back on spending with an economic growth slows down. So the economic impact of a small waterway being blocked in the middle east are far reaching. So what happens next? Well, I think the first in the watch is how long this war will last. President Trump initially said the conflict could take 4-5 weeks, but then on Friday he posted on Truth Social that there would be no deal with Iran except unconditional surrender. So it looks like things are still escalating and neither sides seem to be ready to back down. But I wonder if the rising oil prices might force President Trump's hand. If you guys remember last year after the Liberation Day tariffs were announced, the bond market freaked out and when that happened that forced President Trump to back off the levels that he had initially proposed. So maybe the oil markets might force the same thing with the Iran situation. Now here's one thing that I do want to mention. If you look at the oil futures curve, the December crude prices are trading well below where the spot prices are trading right now. That tells you the market believes that this is a temporary disruption and not a permanent shift. Traders are essentially betting that things will revert closer to normal by the end of the year. Now personally I don't really have a prediction here. I do think those huge spike in oil prices is going to put pressure on President Trump to resolve things quickly, especially with the midterm elections right around the corner. I guess in the meantime I wouldn't be surprised if oil and gas companies continued to outperform the rest of the market. Well alright guys that's it for today's weekend deep dive. Let me know what you guys thought about today's episode. What do you think will happen to the oil markets? I mean this is obviously a fast moving situation. So by the time you listen to this, there might already be new developments. By the way, if you want to stay at the date on all this stuff every day, make sure you guys subscribe to the podcast, just as a reminder, in case anyone's new here, we post a 10 minute market update every day throughout the week. So it's a great way to stay in the loop of everything that's happening in the markets. Also, if you guys enjoyed today's episode and have like five extra seconds, consider giving us a five star rating on Apple, Spotify, or wherever you listen to your podcast, all that engagement really does help us out and it helps other people find the show. Thank you guys so much for listening, watching, and commenting, shout out to Mike and Connor, for all the work behind the scenes. And we'll see you guys back here tomorrow.