Thomas White Global Investing
Middle East
August 22, 2008
A Postcard from the Middle East
Middle East: The Hormuz Straits – Queen of Black Gold

The Hormuz Straits – Queen of Black Gold The Strait of Hormuz is vital to the global economy with tankers transporting around 17 million barrels of oil through its lanes per day.

The small strip of ocean winds lazily around the tip of the Gulf of Oman forming a bridge to the Persian Gulf. The Strait of Hormuz, which is around 30 miles wide at the narrowest point, is the key naval passage connecting the oil drenched Gulf with the rest of the world.

The Strait and the towns of Hormuz have a long historical tapestry woven by travelers, soldiers, sailors and explorers, witnessing commercial importance and richness since centuries past. About 40% of the world’s oil passes through the Strait of Hormuz from the oil exporting Gulf countries to Asia, the U.S. and Western Europe. The Gulf countries together hold about 62% of the world’s oil reserves and the Strait of Hormuz is their lifeline.

Approximately 88% of all oil leaving the Persian Gulf travels via this chokepoint, one of the most important in the world. To regulate the movement of large ships in this constrained environment, the UN’s International Maritime Organization has recognized a Traffic Separation Scheme (TSS). The TSS consists of two, two-mile wide shipping lanes – one for incoming traffic and one for outgoing traffic, leaving little room for maneuvering.

The Strait has been perpetually embroiled in political and economic issues, with tensions constantly brewing between Iran and Iraq, the U.S. and Israel. Since the Iranian revolution in 1979 and the ensuing attack on Iran by Iraq, the Strait has been the primary focus of intervention between these two warring countries. In 1984, Iran threatened to close the Strait after repeated attacks from Iraq disrupted Iranian shipping. However, the Strait is the backbone of oil exports and of the Iranian economy, which deterred Iran from carrying out its threat. The Strait faced impending closure again from Iran recently, but this time in response to Israel’s attack threats, which contributed to an oil price surge, prompting many countries including the U.S. to call on OPEC to increase output.

The Persian Gulf is the energy heart of the world and clamping the main artery, which is the Strait, would choke oil supplies to the rest of the world wreaking havoc in the global economy. For Iran, the Strait is the lever with which they control their international relations using it as both a weapon as well as bait.

This coveted strip of ocean is immortalized in John Milton’s poem “Paradise Lost” where he refers to the “wealth of Ormuz”. Today, Hormuz may well be a paradise that is lost, obscured in the fight for black gold.

Image Credit: eutrophication&hypoxia on Flickr under a Creative Commons License

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