The oil route that is the most crucial to the world has become silent, not due to any military action but due to insurance companies withdrawing from insuring oil tankers travelling through this natural passageway. The cancellation or huge increase in the premium prices charged for insurance by the insurance companies has caused shipowners to stop using this oil corridor virtually overnight.
“To put it another way, I’m not sure what to call this; I’ve never seen anything like it,” said Anas Alhajji, an energy economist. “Although the shipping of oil through the Strait has not been affected by direct military action from Iran, it has been impacted by the actions of the insurance companies in Europe.”
Insurance Shock, Not Missiles
Alhajji argues there have been no significant tankers lost in the strait, yet trade has been severely affected by the cancellation of insurance. Since vessels cannot operate without insurance coverage, the financial impact has halted the movement of crude oil, refined products, LNG, fertiliser, and petrochemical shipments.
It is not a traditional wartime blockade; rather, it is a market-driven stoppage that is affecting the entire globe. Energy traders are now pricing in uncertainty instead of actual damage.
Trump’s Silence Raises Questions
Trump has repeatedly slammed high oil prices yet has been rather quiet regarding the insurance issue.
Michael Alhajji finds it puzzling that Trump hasn’t said anything about insurance, as oil and natural gas (LNG) seem to have been on his mind. Trump has been suggesting that the United States Navy could escort oil or LNG tankers if necessary, which is reminiscent of the maritime protection missions in the 1980s between Iran and Iraq. This type of action would provide stability to the flow of oil or LNG, but at a higher cost to the consumer. The cost of naval escorts provides an added level of security yet also increases premium rates and increases costs for logistical operations.
The higher costs of transportation from the Gulf of Mexico could make U.S. oil and LNG more competitive in the global energy market. Such a change would have a significant impact on energy economics at this fragile time in history.
India in the Crosshairs
India has major concerns regarding the current situation. Approximately 25% of its fertiliser imports are carried through the Strait of Hormuz. The country relies heavily on gas and oil supplies from the Gulf to support its fertiliser production, and with liquefied natural gas (LNG) supplies becoming scarce, particularly from Qatar, Indian officials have requested that fertiliser manufacturers reduce their use of natural gas.
The latest disruption occurs right as planting season is about to begin. Any decline in agricultural output could result in increased imports of food by India, thereby increasing inflation and exacerbating trade imbalances.
The impacts of the crisis extend beyond just India. Bangladesh is experiencing a reduction in power generation due to the shortage of LNG imports, while Egypt and Jordan have lost their supply of gas from Israel. Economies at the margin are the ones most affected.
Markets Brace for Volatility
According to Citigroup projections, if tensions subside within two weeks, Brent crude might remain in the $80 to $90 price range. However, Wood Mackenzie predicts that if tanker flows do not resume quickly, prices could spike above $100.
The shipping insurance crisis has transformed from being merely a shipping issue into a challenge to political will and economic strength. The longer the stalemate lasts, the larger the negative effects will be on oil price charts and on millions of people daily.
