The decision by US President Donald Trump to initiate a blockade of the Strait of Hormuz is one of the most significant geopolitical escalations in recent past. Not only is it a regional chokepoint, but this narrow waterway handles around 20% of the total oil supply and any disruption here has an immediate effect on the global markets.
The blockade comes after the breakdown of high-level negotiations between the US and Iran, which took place over the course of 21 hours, mostly focusing on nuclear obligations and maritime dominance.
The US accuses Iran of controlling the shipping routes, where they are said to charge ships over $1 million each time they pass through safe routes.
Strategically, the US wants to destroy this permission-based system and sever a main source of revenue that helps Iran to finance its military and power in the region.
Washington is essentially attacking Iran by cutting the lifeline of its oil exports by blocking the Iranian ports like Kharg Island and Bandar Abbas.
The US Central Command has started naval operations in the region, and destroyers are already in the Strait. The enforcement tool is not discriminatory, but a blanket ban on vessels that are associated with Iranian ports.
The first indicators are that there are already signs of impact on maritime traffic, with over 150 oil tankers stranded or delayed, causing direct disruption of the supply chain. The blockade will be gradual but may escalate to complete implementation in a matter of days, with military coordination and allied support.
Oil prices surged past $100 a barrel on Monday after the US Navy moved to block shipping to and from Iran through the Strait of Hormuz, raising concerns over potential curbs on Iranian oil exports.
The development followed the failure of Washington and Tehran to reach an agreement to end the war. Brent crude futures jumped $6.96, or 7.3%, to $102.16 a barrel, reversing a 0.75% decline in the previous session.
US West Texas Intermediate rose $8.12, or 8.4%, to $104.69 a barrel after falling 1.33% on Friday.
The blockade has a deep impact on energy-importing countries. India, which relies on the Strait of Hormuz for almost 60% of its oil and fertilizer imports, is extremely susceptible to oil shocks and disruption of supply.
This route is also important to China, Japan, and South Korea, which together contribute a large portion of oil demand globally. The escalating crude oil prices may undermine the balance of trade, as well as escalate fiscal deficits and put strain on local currencies in these economies.
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The oil export revenues of Iran, which are essential for its economic stability, are impacted directly by the blockade. But Iran has threatened retaliation, increasing the likelihood of a military escalation in the region.
To US, the action is an economic and strategic tool to push Iran back to the negotiation table. However, it also raises the exposure to geopolitical risks and may attract global powers in case tensions intensify.