Straight of Hormuz

Panic & Market Psychology

The informed assumption of many concerned members of the media, pundits and even government officials familiar with the significance of the Strait of Hormuz is that any outbreak of violence, regardless of whether it appears to be a one-off explosion or a sustained campaign to "stop" traffic in the Strait of Hormuz, threatens energy security. Their fears may create a self-fulfilling prophecy: damage to a tanker could set off a wave of panic in the global oil market.  In the very short term after any attack, tanker captains may hold off on attempting to transit the Strait, insurance underwriters may wait for more information before indemnifying oil tankers, and oil consumers might immediately bid up the price of oil as they seek an immediate inventory cushion for their own use. The global price of oil might skyrocket almost immediately.

One of the key purposes of the Commercial Issues section of the website is to provide background and insight on the anticipated behavior of the various players in the global oil market — namely oil companies, tanker companies, and insurance underwriters — in the event of conflict in the Strait of Hormuz.  In the short-term, any explosion of note in the Strait, whether on an oil tanker or an ordinary cargo ship, will most likely halt any or all traffic going in and out of the Persian Gulf. We have seen that reaction before during the Tanker War.  However, as time passes, it is likely that a number of other factors at play will begin to allay fears and, ultimately, restore the flow of traffic through the Strait — again, as happened during the Tanker War.

Most tanker companies have defined procedures for tanker masters to follow in the event of any danger in the Persian Gulf and Strait of Hormuz.[i]  Among other things, these procedures direct tanker captains where to "sit and wait" near the Strait — neither the owners of tankers nor the oil companies chartering them want crews to be harmed or ships to be damaged.  But they also want their equipment to be nearby, ready to go back into service as soon as they get the "all-clear," because time is money in the oil transportation business.

As time passes, the most daring ships will try the transit first, and it is only a matter of time before tankers commence their travel in or out of the Gulf.  Once one tanker captain makes it through, another will follow, and so on.[ii]  Or perhaps a group of tankers will coordinate and try the transit together in a convoy, perhaps coordinated by U.S. or Coalition military forces. The U.S. Navy and Coast Guard have maintained a joint liaison office in Bahrain to help organize commercial traffic in the Persian Gulf since the U.S. role convoying tankers in the late stage of the Tanker War. The British Royal Navy maintains a similar office to assist commercial shipping in Dubai.

Undoubtedly, any explosion in the Strait will cause all parts of the oil transportation industry to pause and assess the situation. Once they understand the basic situation, insurance underwriters know how to price insurance to account for risk, and tanker charters know that there is a lot of money to be made taking oil from the Persian Gulf to the world.  There is no historical precedent to suggest that market forces would grind to a halt.[iii]  For the right price, the underwriters will cover the risk (see Insurance Market for more details).






[i] Interview with individuals from ExxonMobil, Leatherhead, U.K., February 19, 2008.

[ii] Interview with individuals from ExxonMobil, Leatherhead, U.K., February 19, 2008.

[iii] Interview with individuals from Thomas Miller War Risks Services Limited, London, U.K., February 20, 2008.  Similar information confirmed in an interview with individuals from Brit Insurance Holdings, London, U.K., February 18, 2008.


This page last modified in August 2008