When war broke out between Egypt and Israel in 1967, fifteen commercial ships were trapped in the Suez Canal. The captains dropped anchor, assuming they would only have to wait a few days for the fighting to end. They were right about the duration of hostilities; it was the Six Day War. However, it took eight years for the canal to reopen. When the ships eventually set sail in 1975, only two remained seaworthy. The others had rusted in the desert sun and are now known as the “Yellow Fleet.”
The Current State of the Strait of Hormuz
Fast forward almost sixty years, and we find history repeating itself in the Persian Gulf. Following the conflict between the United States, Israel, and Iran in late February, the pivotal maritime passage remains closed. Dozens of oil tankers sit at anchor, awaiting a diplomatic resolution that seems perpetually on the horizon but never materializes.
The Optimism Trap on Wall Street
Analyst Javier Blas, in his column for Bloomberg, exposes the dangerous complacency with which the world responds to this closure. The financial sector operates under a modified version of Stein’s Law: “The Strait cannot be closed forever because it would cause excessive economic damage; therefore, it will soon reopen.”
The flaw in this reasoning is clear. The economy hasn’t felt the pain necessary to compel a resolution. Blas notes:
- For Washington: The conflict is proving politically inexpensive. The U.S. economy shows quarterly growth exceeding 4%, and the S&P 500 index is close to historical highs.
- For Tehran: Despite currency plummets and rampant inflation, Iran has displayed an almost limitless capacity to endure economic hardship when confronted with perceived existential threats.
The Aftermath of Closure
As mediators scramble for an agreement in Islamabad, inertia sustains the illusion of normalcy. The market has absorbed the loss of about 20 million barrels per day due to accumulated inventories and substantial strategic reserve releases. However, the global tank is emptying.
Impending Challenges in June
Currently, we don’t see shortages primarily due to transportation dynamics; supertankers move at the speed of a bicycle. The fuel previously consumed in the West left the Gulf before the first missile launched.
However, evidence is emerging that the system is fraying. Global demand fell by 5 million barrels a day in April, marking the largest consumption decline since the COVID-19 pandemic. In Europe, countries like Spain could see inflation exceed 4% if the conflict persists, impacting economic growth and threatening tourism-dependent industries.
The Bigger Picture: The Petrodollar’s Fracture
The ramifications of this crisis extend far beyond rising fuel prices. Key repercussions are forming within the global financial system:
- The petrodollar agreement from 1974, which ensured security in the Gulf in exchange for oil being priced in dollars, is deteriorating. Countries like India have begun liquidating U.S. Treasury bonds to secure liquidity against soaring oil prices.
- Sovereign bond yields are surging as energy inflation persists, with 30-year U.S. Treasury bonds exceeding 5.15%.
- If government bonds yield above 5%, mortgage rates will likely approach 7%, resulting in costlier loans, reduced business investment, and a stagnant real estate market. Some analysts suggest rectifying the economic fallout from Hormuz may necessitate an induced recession.
Alternative Solutions: The Pipeline Bypass
During this period of uncertainty, some have already moved past Hormuz. The United Arab Emirates is fast-tracking the construction of a massive oil pipeline designed to bypass the strait, aiming to export 3.5 million barrels a day directly to the Gulf of Oman by 2027. This is viewed as “prudent planning for the worst scenario,” indicating Abu Dhabi’s belief that the strait may remain under threat for years.
Half a century ago, no one could have predicted that fifteen ships would waste away in the Suez for a war lasting less than a week. Yet today, the world treats the Hormuz crisis as a mere temporary setback. With each passing day, resilience fades, and the markets show increasing strain. The oil remains stagnant in the sea, awaiting a resolution.