The Strait of Hormuz, and what closing it would do
Oil rises on the probability of disruption, which is why it can spike on a threat that never materialises and fall on a war that does.
Understand why a headline about a waterway moves your energy holdings.
How the Strait of Hormuz works, in one picture
The same argument as the text, as a chain. Each step is what makes the next one possible.
One number, four consequences
A rate is the price of the future. Move it, and everything whose value sits in the future is repriced, which is why growth companies fall hardest.
- 1
The geography is the whole story
The Strait of Hormuz is the only sea route from the Persian Gulf to the open ocean. A very large share of the world's seaborne crude, and much of its liquefied natural gas, passes through a channel narrow enough to be threatened from the shore.
- 2
The price is a futures price, so it prices probability
The headline oil price is a contract for future delivery. It therefore moves on anything that changes the expected supply, and a credible threat to a fifth of global supply changes it a great deal, even if not one barrel is actually stopped.
This is why oil can spike on a threat and then fall during the conflict itself. The market bought the risk in advance and sold it when the risk resolved.
- 3
Demand cannot flex, so the price must
You cannot stop driving to work because oil went up 20%. Short-run demand is inelastic, which means a small expected loss of supply produces a large price move. That inelasticity is the amplifier.
- 4
And it feeds straight into inflation
You can trace the path from a threat in the Gulf to a fall in your technology holdings.
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Oil rises on the probability of disruption, which is why it can spike on a threat that never materialises and fall on a war that does.
Every one shows its exact method, and the circumstances in which it is wrong. Free, and no account to look.