The price of crude oil rose sharply in the American session after Donald Trump announced that the US military had shot down an Iranian drone in the Strait of Hormuz. This was the latest provocation in the Strait of Hormuz in the past few weeks. So, why is this Strait so important to the oil market?
In 2018, Donald Trump announced that the US was leaving the Joint Comprehensive Plan of Action (JCPOA), a deal that was negotiated by the Obama administration and other global partners. In latest leaks from the UK ambassador’s comments, the UK believed that Trump abandoned the deal because it was negotiated by Obama. It has been widely reported that Trump did not read the 150-page document.
After the US sanctions on Iran went into effect in November last year, the country continued to do better. This is because the US gave waivers to countries like Russia and India to continue buying Iranian oil. However, this changed in April this year when the US announced that it would not renew those waivers. The goal was to bring Iranian oil exports to zero.
With nothing much to do about the situation, Iran started using the Strait of Hormuz to hold the world hostage. In May, two tankers crossing through the Strait were allegedly attacked. In early June, two other tankers were allegedly attacked. A few days later, Iran shot down an American drone that was flying in the region.
These attacks have not ceased. Two weeks ago, the United Kingdom captured an Iranian ship that it said was supplying crude oil to Syria. A few days later, Iranian boats attacked a British ship but were repelled by a British warship.
Yesterday, the Iran Revolutionary Guard announced that it had taken possession of a foreign tanker that it accused of smuggling crude oil. Later in the day, Trump announced that the US had dropped an Iranian drone.
The Strait of Hormuz is the most important passage in the world. Every day, more than 18 million barrels of crude oil pass through the narrow strait that is located between Oman and Iran. It links the sea passage from the countries of the Gulf. These countries are Iraq, Bahrain, Qatar, and the United Arab Emirates. Traveling by sea, it is the only means of transporting goods or people from these countries to the rest of the world. To avoid conflicts, UAE and Saudi Arabia have proposed building more oil pipelines. As shown below, the Strait is the most important oil passage point in the world.
Iran has used the Strait as leverage before. In early 2012 when the country was highly sanctioned, the leaders threatened to interfere with ships traveling through the Strait. In the 1980s, during the Iran-Iraq war, the two countries routinely menaced each other’s oil shipments. In 1988, a US warship shot down a commercial jet, killing 290 people in the region. Washington said it was an accident.
In the coming months, the region could be significantly volatile as the Iranian economy continues to weaken. With most Iranian businesses closing, Iran can use the attacks as a leverage.