Perspective with Heather du Plessis-Allan: What's the worst-case scenario for the Strait of Hormuz blockade?

The blockade of the Strait of Hormuz has begun and we now have a clearer picture of how it’s going to work.

It doesn’t just cover the strait itself. It runs along the entire Iranian coastline, out through the Gulf of Oman, which the strait feeds into, and then further again into the Arabian Sea.

At least two ships have already been turned back. One of them, unsurprisingly, was headed for China.

Now here’s the key point.

If - and it is a very big if - the United States can successfully keep oil tankers away from Iran, the impact could be fast and severe.

We’re talking 10 to 20 days.

Iran can apparently store only around 13 days’ worth of oil production. Once those tanks are full, they’re forced to start shutting oil wells. And that’s something they really don’t want to do.

Shutting down an oil well can permanently damage its production capacity. There’s no guarantee you ever get it back to where it was. Restarting wells is expensive, risky and slow.

Beyond that, there’s the wider economic hit.

Around 90 percent of Iran’s oil exports go through Hormuz - and they’ve continued exporting despite the war. In fact, they’ve been earning more, not less. Iran has no real alternative route.

So if exports stop, so does the cash.

No oil money means no imports, the currency falls, inflation explodes and you start seeing cascading economic problems very quickly.

The oil production damage is pretty much a slam dunk.

The bigger debate is how fast the broader economy feels it.

Because there’s a counter‑argument here: Iran may already have as much as 160 million barrels of oil floating at sea. If that’s right, China keeps getting its oil, Iran keeps getting paid, and this can drag on through to mid-July.

And that’s the worst-case scenario for the rest of us.

Because then this isn’t a short, sharp shock - it’s a long siege. And that hurts globally. Even the small amount of Iranian oil that’s been leaking onto the market in the past six weeks has been helping to keep prices down.

The Economist is calling this a big gamble and that’s exactly what it is.

This has the potential to cripple Iran quickly - or to strangle the world economy very slowly.

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Episode Transcript

Speaker 1 (00:00):
So the blockade of the Strait of Humus started at
two am our time, and we now have some idea
of how the thing is going to work. It's going
to cover the entire Iranian coastline, the Strait of Humus,
the Gulf of Oman, which is what the Strait runs into,
and then the Arabian Sea which is on the other
side of that. Again, two ships have apparently already been
turned back. At least one of them was headed for
China water surprise. Now, if the US can successfully and

(00:23):
that's the important thing, successfully keep all oil tankers away
from Iran, this could hurt Iran, and could hurt Iran
really quickly, like within twenty days, maybe even ten days,
because of oil storage. Apparently, Iran only has the ability
to store about thirteen days worth of oil production, which
means that once they fill that they have to start

(00:43):
shutting down their oil wells. Now they don't want to
do that because once you shut down an oil well,
you can permanently damage its production capacity. There is no
guarantee that you can get the thing back up to
the levels it was before. And that's not even to
mention the cost of restarting it. It is also possible
that this does enormous damage to the era economy really
quickly as well, because ninety percent of their oil goes

(01:04):
through the Strait and has been going through the Strait
despite the fact that there has been a war. Right,
they've been earning even more than before the war. They
have no alternative to getting most of that oil out.
Cutting off their exports means cutting off their cash for imports,
so the currency starts falling, hyperinflation kicks in, and it's
basically all kinds of problems after that. Now there is

(01:24):
debate about how much it's actually going to hurt the economy.
I mean the oil production thing that's slam dunk. How
much it's going to hurt the economy is up for
debate because it's argued that Iran may have about one
hundred and sixty million barrels of oil floating out at sea,
which means that China keeps getting its oil, Iran keeps
getting its money, and this carries on through to mid July.
Now that is the worst case scenario for the rest

(01:45):
of US, right, because that means the blockade is then
a long play, not a short play, and we're really
going to hurt because even that little bit of oil
that they've been sneaking out for the last six weeks
has actually been very helpful to the world. Now the
Economist magazine is calling this a big gamble, and yes
it is. It has the potential to cripple around really
quickly or strangle the world very slowly. For more from

(02:09):
Heather Duplessy Allen Drive, Listen live to News Talks A
B from four pm weekdays, or follow the podcast on iHeartRadio.