US equity markets sold off only modestly on Friday – the was down only 1.13% — despite news of a massive Israeli attack on Iran, and a first round of serious retaliation by Iran. Market reaction may have been muted based on hopes that Israel’s initial strikes were so successful that the war could be brought to a close quickly.
However, subsequent missile attacks by Iran on Friday evening and Saturday that hit population centers and economic infrastructure in Israel, have made it clear that the Iran-Israel war could potentially become a prolonged affair that is very damaging to both sides.
Many people in the US and around the world are wondering: Why should a war in the Middle East impact my portfolio? In this article we will focus on the main reason why: The risk that the Strait of Hormuz could be closed to commercial traffic.
Why is the Strait of Hormuz Critical?
The most important thing that readers need to understand is that roughly 20% of total global supplies (including petroleum product) pass through the Strait of Hormuz. Geographically, the straight is roughly 20 miles wide at its narrowest point, but the shipping lanes are only two miles wide. Because of the narrowness of the shipping lanes and the peculiar geography of the Strait, Iran can easily shut the Strait of Hormuz for many months through mining, sinking of ships (physical blockage), rocket launches, and drone strikes on ship traffic – among other available tactics.
Strait of Hormuz (Marine Link, Investor Acumen)
Although many people are skeptical, Iran has the military capability to stop virtually all commercial traffic from flowing through the Strait of Hormuz. as I explain in detail in my video entitled, “Iran Can Crash Global Markets: Blocking The Strait of Hormuz.”
(*You can play directly at the bottom of the article).
Many people are under the false impression that the US Navy can prevent this contingency: they cannot. All that Iran needs to do is simply announce that they will sink any ship trying to pass through the Strait. With that mere announcement alone, all traffic through the Strait will be halted. Why? Because no insurer will provide insurance to ships transiting through the Strait and no shipping company will cross the Strait without insurance and risk their crews and vessels. Iran does not need to sink any US Navy Ships (which they have the capacity to do); Iran only needs to have the capacity to sink commercial vessels. And this ability Iran possesses several times over, as they and their Houthi allies have proven repeatedly in recent months.
Indeed, according to a top executive of the top shipping company association in the world, “A full-blown armed conflict between Israel/the US and Iran would most certainly effectively close the Strait of Hormuz at least for a period of time….”
In fact, one might say that it won’t be Iran that halts passage of commercial shipping through the Strait of Hormuz; it will be the maritime insurance companies and the shipping companies themselves.
So, what would happen if all 18-20 million barrels per day stopped flowing through the Strait of Hormuz? Are there alternative routes? There are no alternative sea routes, and overland alternative routes are extremely limited. Those interested in more details regarding military strategy impacting the Strait of Hormuz can consult the “Oil Shock” play list.
What Happens if the Strait of Hormuz is Shut?
Various estimates (including a U.S. GAO estimate in 2006) suggest that a shutdown of the Strait of Hormuz could cause a tripling or quadrupling of global oil prices, implying an oil price that could exceed $300.
There is historical precedent for this. During the 1973-1974 Oil embargo, global oil prices quadrupled. What is interesting is that during the Arab Oil Embargo, total global oil supplies were restricted by less than 4% (on average), for only a few months. To put this into context, this would be roughly equivalent to a multi-month global crude oil supply disruption of 4 million barrels per day.
As we have seen, a disruption of oil flows through the strait of Hormuz could disrupt 20% of global oil supplies global oil supplies (18-20 million barrels) — a disruption that is roughly 4-5 times as large as the Arab Oil Embargo which caused global oil prices to quadruple.
Although the world is somewhat more prepared than it was in 1973 (e.g. emergency petroleum reserves), a major multi-month supply disruption at the Strait of Hormuz could quite easily cause global oil prices to rise beyond $300 per barrel. This is fundamentally due to the fact that demand for oil is extremely inelastic.
What Happens When there Is a Major Oil Price Shock?
Major oil price shocks have triggered most business cycle recessions in the US. Oil price shocks played a major roll in recessions in 1973-1974, 1979, 1982, 1991, 2000 and 2008. More recently, a very brief oil price shock caused a near-recession in 2022 (two consecutive quarters of negative GDP growth).
Based on extensive historical precedent, there is very little doubt that an oil price spike that caused oil prices to rise above $150 for several months would likely trigger a business cycle recession in the US.
What would this mean for financial markets? Historically, every single major oil price shock that has led to a business cycle recession has resulted in a stock market decline of 20% or more. The Arab Oil embargo — which is probably most similar to the situation that could develop in 2025 — resulted in a brutal bear market decline of almost 50%.
Why Would Iran Want to Shut the Strait of Hormuz?
The reason that Iran might decide to shut down traffic through the Strait of Hormuz can be explained with one word: Blackmail.
If the Iranian regime feels like it is being backed into a corner by Israel and possibly the US, Iran may decide to pull its “Hormuz card”. As has been explained above, blocking the Strait of Hormuz would trigger a massive global recession and a financial crisis. Under such conditions, all of the major powers of the world would place enormous pressure on Israel and the US to bring a quick end to hostilities. In an extreme situation, this may be the only means of survival for the the regime of the Islamic Republic of Iran.
Would Iran ever take the decision to shut the Strait of Hormuz? While, the Iranians know that such a move would be risky (the entire world could potentially become Iran’s enemy), they have actively been preparing for exactly this scenario for decades. They have trained their armed forces and have developed sophisticated tactics and technology to accomplish this purpose.
Indeed, Iran has long believed that it has a legal right to limit transit through the Strait of Hormuz at will, since it claims that the Strait is part of its territorial waters. The have even developed an extensive jurisprudence on this issue.
No one should doubt that shutting the Strait of Hormuz is actively considered to be a policy option in Iran. In February, March and April of 2025, the Iranian Revolutionary Guards’ naval commander Alireza Tangsiri reiterated the threat of closing the strait emphasizing Iran’s capability and preparedness to do so. Furthermore, the President of Iran, Masoud Peseshskian, and his spokesperson have said that in the event of a disruption of Iran’s ability to export oil, Iran will close the Strait of Hormuz. Indeed, these are only the latest threats in a long history of dozens of such threats that Iranian officials have made of the course of the past two decades.
On Saturday, threats of a potential blockage of the Strait of Hormuz were reported from a General of the Iranian Revolutionary Guard that is also a member of the Iranian parliament, Esmail Kosari. He said that said that blocking the Strait was currently being actively considered by the Iranian leadership.
The possibility of shutting the Strait of Hormuz is a matter of national policy in Iran and it is something that they have long threatened and been prepared to do.
Conclusion
Iran has the capacity to shut all commercial traffic through the Strait of Hormuz. It has a clear national policy on this issue and has developed sophisticated and asymmetric strategies enable a shut-down.
Global financial markets appear to be almost completely unaware and/or complacent regarding this risk. However, this risk is going to come very prominently into focus over the course of the next few weeks.
In particular, if Israel chooses to target Iran’s oil export infrastructure, Iran’s top leaders (including its Presidents and Supreme Leader) have stated on various occasions that it its national policy that if Iran is prevented from exporting its oil then no oil from any nation in the region will be exported. This means that any attack on Iran’s oil infrastructure could immediately trigger a shut-down of the Strait of Hormuz.
Will Israel attack Iran’s oil infrastructure?
Israel has reportedly warned Iran that if it strikes population centers in Israel, that Israeli forces will target oil infrastructure in Iran. Israeli Defense Minister Israel Katz suggests that this red line may have been crossed. And, indeed, Israel has already struck at some internal energy infrastructure inside of Iran (not export-oriented). There is a very really risk that a chain of escalatory events are already in motion which would eventually lead to Iran blocking the Strait of Hormuz.