What you didn’t know about the Strait of Hormuz

The Strait of Hormuz is one of the most critical oil transit routes in the world, and any disruption there carries far-reaching implications for global energy markets, including countries like Nigeria.

It is described as a narrow waterway located between Oman and Iran, connecting the Persian Gulf to the Arabian Sea.

At its narrowest point, it is about 33 kilometres wide, yet it handles a disproportionately large share of global oil shipments.

This strategic passage serves as the main export route for major oil-producing countries in the Gulf, including Saudi Arabia, Iraq, Kuwait, and the United Arab Emirates.

Read also: Goldman Sachs raises oil forecasts as Hormuz disruption triggers largest-ever supply shock

A significant portion of the world’s crude oil and liquefied natural gas (LNG) flows through this corridor daily, making it a vital entry for global energy supply.

Why it matters to global energy markets

The importance of the Strait of Hormuz lies in its strategic risk. A large share of global oil supply passes through a single, narrow route that is vulnerable to geopolitical tensions.

Any threat—whether from military conflict, sanctions, or shipping disruptions—can trigger immediate reactions in global oil prices.

Over the years, tensions involving Iran and Western powers, particularly the United States, have heightened concerns about the security of the strait.

Even without a full closure, the mere risk of disruption often leads to price volatility as traders factor in supply uncertainties.

For oil-importing countries, this translates into higher fuel costs. For exporters, it can mean increased revenues in the short term but also heightened uncertainty in planning and investment.

Unlike other global shipping routes, the Strait of Hormuz has limited viable alternatives. While some Gulf countries have developed pipelines to bypass the strait, these options cannot fully replace the volume of oil transported by sea.

A partial blockage or heightened insecurity can constrain supply chains, delay shipments, and push up insurance and freight costs for tankers.

Read also: Top 5 countries shipping oil out of the strait of Hormuz

Broader economic implications

Disruptions in the Strait of Hormuz do not only affect oil prices. They also have ripple effects across global trade, inflation, and economic stability.

Higher energy costs can increase production and transportation expenses, feeding into broader price increases for goods and services.

For developing economies like Nigeria, which are often more vulnerable to external shocks, such volatility can strain foreign exchange reserves and worsen inflationary pressures.

Experts polled by BusinessDay have said that with the ongoing war, Nigeria’s moderating inflation could spike again, eroding months of respite for Nigerians.

How the Strait affects Nigeria

For Africa’s most populous nation, the Strait of Hormuz plays a vital role for the country’s position as both an oil exporter and a major importer of refined petroleum products.

While rising global oil prices triggered by tensions in the strait can boost Nigeria’s crude oil revenues, the benefits can also be offset by structural challenges.

Although the Dangote Refinery now contributes significantly to Nigeria’s fuels and even supplies to other African countries, the country still relies on imported refined products.

This means that higher global oil prices translate directly into increased costs for petrol and diesel.

When fuel prices increase, the costs of production for manufacturers also spike. This also spills into the prices of food, as high logistics costs invariably affect market prices.

In addition, higher freight and insurance costs associated with shipping disruptions can further increase the landing cost of imported fuel.

For an economy already grappling with currency volatility and energy supply constraints, this could mount further inflationary pressures.

There are also implications for energy security. Global supply disruptions can tighten product availability, potentially leading to shortages.

Only recently, Ikeja Electric, a Lagos electricity distribution company, attributed the ongoing reduction in electricity supply to the communities it serves to a nationwide decline in power generation caused by limited gas supply to thermal power plants.

“The ongoing reduction in electricity supply is largely due to a nationwide drop in power generation, caused by limited gas supply to thermal power plants,” the company stated, adding that this has significantly reduced the energy available on the national grid and, consequently, their allocation and other distribution companies.