Every few years the Strait of Hormuz returns to the headlines, usually accompanied by dramatic photographs of warships, oil tankers and stern diplomatic warnings.
Then the immediate crisis subsides and the world largely forgets about it. That is a mistake. The Strait of Hormuz is arguably the single most strategically important stretch of water on the planet. Barely 33 kilometres wide at its narrowest point, it carries around one-fifth of the world’s seaborne oil and a substantial proportion of global liquefied natural gas. Every motorist in Colombo has a direct financial interest in what happens there.
Iran has periodically threatened to close the Strait whenever tensions with the United States or Israel intensify. Whether Tehran could actually sustain such a closure is another matter entirely. The United States Fifth Fleet, together with allied naval forces, maintains a formidable presence in the Gulf, while Gulf producers themselves have developed limited alternative export routes.
Nevertheless, shipping need not stop completely for markets to panic. Insurance premiums rise, freight costs increase and traders begin pricing in the possibility of disruption long before the first tanker is delayed.
The consequences extend well beyond fuel. Higher oil prices quickly filter into electricity generation, aviation, shipping, fertiliser, plastics and food production. Inflation, which governments spend years attempting to contain, can reappear within weeks.
Central banks then face the unenviable choice of raising interest rates to suppress inflation or accepting slower economic growth. A regional military confrontation therefore becomes an economic event affecting households thousands of kilometres away.
For Sri Lanka, the vulnerability is particularly acute. The country imports virtually all of its crude oil requirements while depending heavily upon maritime trade. Fuel is not merely another imported commodity. It is the foundation upon which transport, manufacturing, tourism and electricity generation all depend.
Hormuz…
Every additional dollar added to a barrel of crude eventually appears somewhere in the national economy, whether through higher transport fares, more expensive goods or pressure on public finances.
The wider lesson is that geography still matters. Despite extraordinary advances in technology and finance, the global economy continues to rely upon a handful of narrow maritime chokepoints.
