Turning Point in the Hormuz Strait Tensions

Ehsan Soltani

The Strait of Hormuz, situated between Oman and Iran, serves as a critical maritime route connecting the Persian Gulf with the Gulf of Oman and the Arabian Sea. Given the substantial volumes of oil that traverse this strait, it holds the distinction of being the world's most vital oil chokepoint. Critically, due to limited alternative routes for oil exports from the region, approximately 90% of the Persian Gulf's oil exports are funneled through the Strait of Hormuz. Oil tankers transported an estimated 20 million barrels per day through this passage in 2022.

Following the imposition of sanctions on Iran's oil exports, the country has strategically employed restrictions on the flow of oil through the Strait of Hormuz to exert pressure primarily on Western countries, particularly the United States, in a bid to alleviate the restrictions imposed on its oil exports. However, a paradigm shift in the global energy production and trade landscape has diminished the effectiveness of this leverage. Developing economies have now emerged as the primary importers of crude oil, displacing Western countries and their allies from their long-standing position as the main market for world energy imports.

The Persian Gulf Countries: The Global Energy Powerhouse

The Persian Gulf, renowned for its vast energy resources, plays a significant role in the global oil and gas industry. With proven crude oil reserves reaching an impressive 1,564 billion barrels, the region holds a substantial 55% share of the world's total. This abundance has positioned the Persian Gulf countries as major players in the international energy market.

In the year 2022, the Persian Gulf countries collectively exported an average of 22.5 million barrels per day (MMB/D) of crude oil and petroleum products. Out of this volume, approximately 18.1 MMB/D consisted of crude oil alone. These exports accounted for a noteworthy 42% of the world's crude oil exports, highlighting the Gulf's significance as a global oil supplier. Additionally, the region contributed to 31% of the world's total oil production during the same period.

The Persian Gulf's prominence in energy market extends beyond oil. The countries within the region also possess substantial natural gas reserves. Combined, these reserves make up 39% of the world's proven natural gas reserves, underscoring the Gulf's substantial contribution to global energy resources. In terms of production, the Persian Gulf countries accounted for 17% of the world's total natural gas production. Moreover, their exports constituted 13% of the global natural gas trade, underscoring the influence of Gulf's countries on the gas market.

Dynamics of Crude Oil Exports from the Persian Gulf: A Shift in Global Trade

Over the past two decades, the global landscape of crude oil exports from the Persian Gulf has undergone significant transformations. In the 21st century, a remarkable shift in oil flow patterns has been observed, with striking implications for the United States, the European Union, and China.

From 2001 to 2022, crude oil exports from the Persian Gulf to the United States experienced a notable decline of 72%, plummeting from 2,660 to 740 KBPD (thousand barrels per day). A similar trend was witnessed in the European Union, where exports decreased by 37%, falling from 2,330 to 1,460 KBPD. In contrast, China emerged as a formidable force in the global oil market, experiencing an unprecedented 800% increase in Persian Gulf oil imports, skyrocketing from 630 to approximately 5,800 KBPD.

In 2022, United States and the European Union's share of Persian Gulf crude oil imports decreased to 4.1% and 8.1%, respectively, while China claimed an overwhelming portion, importing more than 30%. Persian Gulf oil accounted for 12% of the United States' total crude oil imports, 15% of the European Union, and an astounding 55% of China.

China has emerged as the world's largest importer of crude oil, commanding a substantial 23% share of global imports in 2022. The triumvirate of Saudi Arabia, Russia, and Iraq emerged as China's key suppliers during this period. Notably, Russia's position as a dominant crude oil provider to China strengthened in recent months, surpassing Saudi Arabia's exports in the first half of 2023.

Shift in Persian Gulf Trade Dynamics: China's Dominance

In the year 2022, the total trade of Persian Gulf countries reached an impressive sum of around 1,800 billion dollars. A substantial portion of this trade, exceeding 90%, was conducted with partners outside the Gulf region.

A notable trend that emerged over the years is the shifting trade dynamics with major global players. Back in 2001, Persian Gulf trade with the combined total of the United States and the European Union dwarfed its trade with China, by nearly seven times. However, recent years have witnessed a significant transformation in these trade patterns, with a remarkable rise in trade with China.

The trade relations between Persian Gulf countries and China experienced exponential growth, soaring by more than 2700% from 2001 to 2022. By the end of 2022, the total trade with China amounted to a staggering 385 billion dollars, reflecting the increasing significance of this economic partnership. On the other hand, in the same year, the total trade between the Persian Gulf countries and the European Union amounted to 219 billion dollars, while their trade with the United States stood at 95 billion dollars.

Conclusion

The era of United States energy dependency has come to a close as it emerged as a net energy exporter since 2020. In 2022, the U.S. recorded a remarkable total trade balance of 56 billion dollars for mineral fuels and products. Specifically, the trade balance of crude oil and petroleum products amounted to 1,260 thousand barrels per day during the same year.

Conversely, China remains heavily reliant on energy imports, with a notable emphasis on crude oil. In 2022, China's imports of mineral fuels and products reached a substantial value of 535 billion dollars, with a significant portion of 366 billion dollars spent solely on crude oil. This led to China's trade deficit of 470 billion dollars in mineral fuels and products.

Overall, the above trends illustrate that energy security is a critical concern for China, with the Persian Gulf being a pivotal region for the country's energy supply. Consequently, China has been cultivating strong and expanding trade and economic ties with all Persian Gulf countries, making the stability and peace in this region a top priority for China.

Due to a lack of diplomatic ties with the United States and a limited relationship with the European Union, Iran has increasingly turned to China as its predominant trade and economic partner. This heavy dependence on China has resulted in Iran’s submission to China’s foreign policy. Most recently, following Chinese President Xi Jinping's visit to Saudi Arabia in December 2022, representatives from Iran and Saudi Arabia convened in Beijing for discussions mediated by China in March 2023. Subsequently, after four days, Riyadh and Tehran jointly declared their decision to normalize their relationship after seven years.

In summary, despite the strait’s critical role as the world’s primary oil choke-point, the United States and its allies now rely less on Middle East oil, while this dependence has significantly increased for China. This means that Iran's ability to significantly disrupt oil flows through the Strait of Hormuz could have more negative impacts on China’s economy than on the U.S./EU, and thus, it cannot be used as leverage to persuade the U.S. to lift sanctions. Meanwhile, a disruption in the Hormuz Strait could create more benefits for the U.S. oil industry due to the resulting increase in the price of oil.

Remarks:

Persian Gulf countries included Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab Emirates
All figures and numbers are based on official statistics of OPEC, The U.S. Energy Information Administration (EIA), Eurostat, General Administration of Customs of the China, WTO, and UN Comtrade