What Happens if Iran Closes World's Most Important Oil Route? Prices Rise and War Likely

Iran has threatened to block access to the world's busiest oil route in response to U.S. sanctions designed to reduce the revolutionary Shiite Muslim power's petroleum exports to zero. While there has been no indication that Iran was prepared to go through with the warning, such a move would likely be catastrophic for the region and global energy prices.

The first batch of U.S. sanctions on Iran came into effect Monday, following President Donald Trump's withdrawal in May from a 2015 landmark nuclear deal between the two countries, as well as five other major powers. These sanctions include restrictions on Iran's manufacturing, aviation and automobile industries, but the next round on November 4 will specifically prohibit international companies from doing business with the country's oil and gas sector.

Amid a political shouting match between the U.S. and Iranian governments, Iran's elite and highly influential Revolutionary Guards reportedly staged a large-scale military exercise in the Strait of Hormuz, where nearly a third of the world's oil supplies pass through. The hardliner force has championed Iranian President Hassan Rouhani since he appeared to threaten to close the oil chokepoint, an order that the Revolutionary Guards leadership said it would be eager to carry out.

Despite these high-running tensions, Texas-based think tank Geopolitical Futures's Director of Analysis Jacob Shapiro told Newsweek it was "exceedingly doubtful" that Iran would ever actually risk shutting down the critical lifeline for global oil trade. In the event that it did, however, he said that "the consequences of taking this step would be dire."

GettyImages-136351512 Iranian military personnel place a national flag on a submarine during the "Velayat-90" naval exercises in the Strait of Hormuz in southern Iran, on January 3, 2012, on the last day of the 10-day war games. Iran's grip on the critical oil route also made headlines that year as Washington and Tehran's nuclear dispute threatened to erupt into armed conflict. EBRAHIM NOROOZI/AFP/Getty Images

"If Iran decided it had nothing left to lose because U.S. sanctions are effectively killing Iranian oil exports and prioritized looking strong at home over all else, there would be a large, short-term spike in the price of oil. After all, about 30 percent of all seaborne-traded crude oil goes through the Strait of Hormuz," Shapiro said.

"But the important thing to keep in mind here is it would be a temporary spike. Sooner or later (and probably sooner), the Strait of Hormuz would be reopened. U.S. shale producers would send production into overdrive. Russia would also look to increase production and replenish its much-depleted coffers. The most significant consequence of a Strait of Hormuz closure might ironically be a cash infusion for Russia's struggling economy," he added.

Shapiro argued that such a move would be unsustainable on Iran's part as it would "result in a foreign intervention." The U.S. military would likely get involved on behalf of Sunni Muslim monarchies such as Kuwait, Saudi Arabia, Qatar and the United Arab Emirates, and the Iranian military simply does not compare in terms of strength. Still, the recent Revolutionary Guards exercise in the Strait of Hormuz caught the attention of the Pentagon's leadership.

U.S. Central Command chief General Joseph Votel told reporters at the Pentagon Wednesday that Iran was "trying to use that exercise to send a message to us that, as we approach this, the period of the sanctions here, that they had some capabilities." While incidents between U.S. and Iranian vessels have occurred in the region's tense waters, Votel said that the exercise—which involved some 100 Iranian vessels—did not coincide with any harassment of foreign personnel.

"Iran has a layer of capabilities here, you know, including mines, that include explosive boats, that include, you know, coastal defense missiles and radars, and other things. So, you know, they certainly have some capabilities there. But I would just suggest we have capabilities as well," he added. "And, you know, we routinely focus on demining exercises in the region and we maintain the forces and readiness, as do some of our partners in the region that are well-trained, well-prepared to deal with these types of situations."

In addition to facing a potentially serious defeat, domestic factors were also at play. Iran has enhanced its regional influence via support for the mostly Shiite Muslim movements that have helped allies Iraq and Syria to overcome insurgencies and has developed its own ballistic missile capabilities, but these costly endeavors have taken a toll on the economy. The Trump administration's decision to renege on the U.S. nuclear agreement commitments has further plunged the Iranian currency into turmoil and prompted rare protests across major Iranian cities.

RTX6DC71 A map published July 30 shows the world's main oil transit chokepoints and major oil movement routes. While Iran's threat to close the Strait of Hormuz has prompted some international anxiety, many countries have blamed the U.S. for abandoning the nuclear deal in the first place. U.S. Energy Information Administration/International Tanker Owners Pollution Federation/Reuters

Iran's reputation may suffer internationally as well. Even countries still willing to do business with Tehran such as China, Iraq and potentially India may turn against it due to their dependence on the Strait of Hormuz being open. This would be especially damaging at a rare time when the U.S. found itself largely isolated internationally in regards to Trump's recent moves vis-a-vis Iran.

Fellow nuclear accord signatories China, France, Germany, Russia and the U.K. have roundly rejected Trump's argument in abandoning the deal, which he has long argued failed to curb Iran's support for militant groups abroad and long-term nuclear ambitions. The EU has even threatened to impose counter-sanctions on any companies that adhere to the unilateral U.S. measures.

As a result, Iran has remained defiant and Iranian Foreign Minister Mohammad Javad Zarif told the state-run Islamic Republic of Iran News Network on Wednesday that "no one trusts America anymore" and that Rouhani's warning last month was "a warning to the Americans, who deal in psychological warfare."

His words were echoed by Iranian Defense Minister Brigadier General Amir Hatami who said that same day: "It is clear that this time, the enemy’s all-out war with the Islamic Establishment is political, economic, cultural and psychological," according to the semi-official Tasnim News Agency. "All should learn a lesson from [the Americans'] irresponsible behavior and realize the depth of their hostility toward the great nation of Iran."

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