The Strait of Hormuz is losing value
On 14th June, the United States and Iran signed a memorandum of understanding to reopen the Strait of Hormuz after months of disruption. Shipping traffic remains subdued as operators seek reassurances over safe passage, but the direction of travel is cautiously positive. Yet the more important story is not the Strait’s reopening, but what its closure revealed. The global energy system is far more adaptable – and far less dependent on this critical bottleneck – than had long been assumed.
Before hostilities, roughly 20 million barrels of oil a day – around 20% of global demand – flowed through the Strait. Its closure had been framed as a worst-case scenario for markets, with forecasts suggesting prices could surge from $65 per barrel to as high as $200, triggering inflation, recession, and a sharp sell-off in risk assets. In the event, none of this materialised. Oil prices rose, but stabilised around $100 per barrel, economic disruption was real but contained, and markets proved resilient.
For years, the Strait had been treated as a singular source of vulnerability. Its closure was expected to deliver a systemic shock. Instead, the global economy adjusted. As the old adage goes, when one door closes another opens, and both supply and demand responded with greater flexibility than anticipated. The Strait remains important – but it may now be a depreciating asset.
Source: EMOGCP – Russian Oil and Gas Monitor – Ronald P. Smith
The loss of roughly 20 million barrels per day was mitigated in a variety of ways. The Strait itself was never fully closed for long, with 1–2 million barrels per day still moving covertly along the Omani coast. Saudi Arabia rerouted up to 5 million barrels per day via the East-West pipeline to the Red Sea. The UAE diverted approximately 0.75 million barrels per day through its Habshan-Fujairah pipeline, while Iraq exported smaller volumes – around 0.25 million barrels per day – through the Kirkuk-Ceyhan route.
Higher prices also incentivised supply from outside the region, with the United States, Canada, Brazil and Kazakhstan increasing output. At the same time, demand adjusted, supported by strategic reserve drawdowns and substitution toward alternative energy sources, including coal and renewables. In aggregate, the initial shock was reduced to a shortfall of perhaps 5-10 million barrels per day – significant, but manageable within the system’s existing flexibility.
The over-reliance on the Strait has shifted from a latent threat to a real one, and recent events have prompted countries to reassess their supply lines. For instance, in Iraq, after years of debate, work has started on the Basrah-Haditha pipeline, which could be extended to Aqaba on the Red Sea or to Ceyhan on Turkey’s Mediterranean coast. Kuwait is exploring options to tap into the Saudi East-West pipeline or revive the mothballed Trans-Arabian Pipeline through the UAE.
Ironically, President Trump’s actions towards Iran have inadvertently promoted the use of renewable energy sources – this from the man who described renewables as the “Green New Scam” and who has twice withdrawn the United States from the Paris Agreement on climate change. Not only are renewables a cost-effective solution, but they are not dependent on exports from an uncertain region of the world. As one pundit said, sunlight travels 93 million miles to reach Earth, and none of those miles go through the Strait of Hormuz.
Despite President Trump’s call to “drill, baby, drill”, solar power in the US last month overtook coal-fired power for the first time. Renewables are growing fastest in China. In 2025, China installed 543 gigawatts of renewable capacity, equivalent to the entire electricity capacity of Germany. It is estimated that by the end of this year, half of Chinese electricity will come from renewables. The Russians have been lobbying China to build the Siberia-2 gas pipeline and other related oil pipelines, but with renewable energy capacity growing so fast, China may see little long-term need for imported gas and oil. It may be both economically and strategically preferable to rely on domestic renewable capacity rather than imports from an uncertain neighbour.
The implications are both economic and strategic. Infrastructure designed to expand long-distance oil and gas trade may face weaker long-term demand, while capital is increasingly directed toward resilience – pipelines, storage, diversified routes – and toward electrified, domestically anchored energy systems. The geopolitical risk premium embedded in oil markets may therefore erode over time.
The Strait of Hormuz remains important, but it is no longer irreplaceable. Like any asset, its value is shaped by utilisation, competition, and the availability of substitutes. On all three fronts, its position is weakening. Flows have been rerouted, alternatives expanded, and demand itself is gradually evolving. What was once the defining bottleneck in the global energy system is becoming one route among many. The world has not only adapted to disruption – it has accelerated beyond it. In doing so, it has reduced the strategic leverage of the Strait and, with it, the premium it once commanded. The depreciation is underway.
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