Strait of Hormuz Closure: The Global Procurement Impact

As geopolitical tensions escalate, highlighted by Israel's "pre-emptive strike" on Iranian territory on 13 June, the procurement sector faces significant challenges.

Brent crude prices surged over 10%, reaching US$73.12 a barrel, while US crude on the NYMEX exchange was pegged at US$73.20. These price fluctuations instigate concerns among procurement executives about the robustness of their supply chains should the conflict widen.

The Iranian parliament's move towards closing the Strait of Hormuz constitutes a distinct concern for procurement professionals. Situated between Iran and Oman, this pivotal 50km-wide shipping corridor handles around 20% of global oil supplies daily.

The potential closure could drastically disrupt the flow of a billion dollars' worth of oil shipments each day, severely impacting economies dependent on Middle Eastern oil.

How crucial is the Strait of Hormuz?

Potential disruption in the Strait of Hormuz is not merely a regional quandary but a substantial threat to global energy distribution and procurement operations.

As reported by the US Energy Information Administration (EIA), around 20 million barrels of oil are transported through this critical channel daily, amounting to an annual trade value of US$600bn.

The strait doesn't solely handle Iranian oil but also facilitates the transport of crude from Iraq, Kuwait, Saudi Arabia, Qatar, and the UAE to vital markets across Asia, Europe, and beyond.

Derren Nathan, from Hargreaves Lansdown, states: “The outlook for Iranian exports is a concern, but also the potential for disruption to shipping in the Persian Gulf’s Strait of Hormuz. It’s a key route for about 20% of global oil flows and an even higher proportion of liquefied natural gas haulage.”

The possibility of an interruption adds pressure to an already strained global supply chain. The passage, which just 33km wide at its narrowest, sees tankers manoeuvring through, which heightens logistical concerns.

Regional importers brace for changes

Key importing countries like China, India, Japan and South Korea face impending cost increases. With more than 80% of oil and condensate leaving through Hormuz destined for Asia in 2022, supply chain professionals are closely monitoring the situation.

China currently absorbs nearly 90% of Iran's oil exports. For India, approximately 50% of its crude and 60% of its natural gas imports transit through Hormuz, while South Korea and Japan rely on it for 60% and 75% of their crude imports respectively.

If Iran were to try closing it, analysts believe that mines deployed by fast-attack boats or submarines could render the waterway impassable.

This presents a strategic challenge, as Iran's navy might target commercial or military vessels, igniting potential military responses from the US.

Secretary of State Marco Rubio says: "It would hurt other countries’ economies a lot worse than ours."

Alternatives and risks

Currently, explorations into alternative trade routes are proving insufficient. Saudi Arabia’s 1,200km East–West pipeline, which redirects oil to the Red Sea, can handle up to five million barrels daily, and the UAE channels oil to Fujairah on the Gulf of Oman, accommodating 1.5 million barrels per day.

Iran's Goreh–Jask pipeline, operational since 2021, ships 350,000 barrels but has faced export limitations as of September 2024.

According to Saleem Khan, Chief Data & Analytics Officer at Pole Star Global, potential incidents such as the recent collision of two oil tankers in the UAE’s Persian Gulf, although not security-related, result from vulnerabilities that could involve electronic interference—a reminder that risks persist.

Despite the availability of alternative routes, they collectively manage about 3.5 million barrels per day—far below the Strait of Hormuz’s capacity. As reported by the EIA, the strait managed over a quarter of global seaborne oil trade in 2024 and a fifth of global petroleum consumption, emphasizing its indispensable role in the supply chain landscape.

However, plausible disruptions elsewhere, as seen at the Bab al-Mandeb Strait, have urged countries like Saudi Arabia to channel shipments through inland pipelines. The US, importing only 7% of its crude through Hormuz due to increased domestic production and Canadian supply, may find itself less vulnerable than others.

Energy analyst Vandana Hari summarises the predicament, suggesting Iran has "little to gain and too much to lose" from closing the strait—decisions affecting procurement, trade diplomacy and geopolitical alliances, particularly with China.

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