...this event, if materialises, could re-ignite Supply Chain Shock 2.0, drive inflation higher
...and the biggest risk to Japan and the yen carry trade.
...this war could have more far-reaching consequences for the world economy than did the Ukraine war.
(1/2) What Happens If Iran Closes the Strait of Hormuz?
⸻ Strategic Context: The Strait of Hormuz is the most critical maritime chokepoint in the world. Roughly 20% of globally traded crude oil and 30% of global LNG shipments transit its narrow waters daily. If Iran were to close or significantly disrupt the Strait via mining, anti ship missiles, drone swarms, or fast-attack naval craft it would initiate not just a regional crisis, but a systemic shock to the global economy, supply chains, and security architecture.
⸻ First-Order Effects (Immediate – Week 1)
Energy Spike: Crude oil could surge $30–$60 in days. Brent could reach $130–$150 depending on the perceived duration of disruption. Natural gas, especially LNG bound for Asia, would become acutely scarce. Expect JKM LNG benchmarks in Japan and Korea to spike. Markets Rattle: U.S. Treasuries initially bid on safety, but duration risk quickly re-emerges as inflation expectations surge. Equities fall across the board, led by energy-sensitive sectors. VIX jumps above 25–30, with MOVE rising in tandem. The dollar may rally on safe-haven flows short term, but this masks structural fractures beneath the surface. Naval and Kinetic Escalation: The U.S. Fifth Fleet, based in Bahrain, would mobilize rapidly. Mine clearing, naval escorts, and possibly kinetic strikes against Iranian coastal positions would follow. Israel may act preemptively in Lebanon or Syria, fearing regional encirclement.
⸻ Second-Order Effects (Week 2–4) Global Trade Shocks: Energy shipping is rerouted around the Cape of Good Hope, increasing cost and delivery time. Marine insurance premiums soar. Container shipping prices spike again, particularly to Europe and Asia. Expect secondary port congestion and cascading logistical delays. Macro Repricing: Central banks in energy-importing countries (India, Japan, EU) begin defensive FX interventions and emergency energy procurement. Expect drawdowns in reserves, sovereign wealth reallocation, and possible covert bilateral deals with Gulf producers. Supply Chain Strain: Fertilizer prices climb due to natural gas shortages. Food commodities spike especially wheat and soybeans. Nations reliant on subsidized energy (Pakistan, Egypt, Indonesia) face currency stress and domestic instability.
(2/2)
Third-Order Effects (Month 2–3)
Sovereign Credit Risk: Rising energy costs crush current account balances in emerging markets. Countries begin to experience external debt stress, leading to IMF intervention and sovereign downgrades. The eurozone periphery comes under pressure again. U.S. Fiscal/Military Strain: Rising oil prices push headline inflation back up just as the Fed faces pressure to cut. Interest expense on U.S. debt increases. Simultaneously, defense spending surges. Dollar demand from foreign central banks weakens as Treasury supply expands. This increases the risk of a long end liquidity vacuum, rates may rise even as growth stalls.
Multipolar Shifts: China, the primary buyer of Iranian oil, is placed in a geopolitical bind. It may intervene diplomatically or even provide naval escort to Iranian shipments. This would be a direct challenge to U.S. hegemony. Russia benefits from higher energy prices and global distraction, increasing its leverage in Ukraine. Cyber and Information
Warfare: Expect asymmetric Iranian retaliation: maritime cyber sabotage, oil infrastructure hacking, or psychological disruption campaigns against Gulf states or U.S. critical infrastructure.
⸻ Strategic Implications: This is not just a regional military scenario.
It is a full-spectrum test of the post-Cold War globalization model.
The closure of Hormuz would:
•Reintroduce energy scarcity pricing into markets that had priced in abundance
•Expose fragility in just-in-time logistics and centralized maritime trade routes
•Undermine confidence in the dollar and U.S. deterrence, especially if the conflict drags out
•Accelerate BRICS led de-dollarization efforts as energy security becomes sovereign again
⸻ Known Unknowns:
•Will China use the disruption to bypass the petrodollar system entirely?
•Can the U.S. project force without triggering an uncontrollable regional war?
•Will Gulf states remain aligned with the West or hedge toward neutrality?
•Does this catalyze a larger monetary or credit event in fragile economies?
⸻ Final Assessment:
A full or credible partial closure of the Strait of Hormuz is not just a military event it’s a systemic rupture. It exposes the illusion that energy security and capital markets are divorced from geopolitics. It would mark a moment of realization that force, geography, and chokepoint control still underpin the digital and financial abstraction layer that has defined global order since the 1990s. The result would be rapid repricing across commodities, currencies, credit, and confidence potentially setting the stage for a new era of capital controls, energy blocs, and multipolar power projection.
