On Tuesday, two commercial tankers came under attack while transiting the Strait of Hormuz through Omani territorial waters. Gulf Cooperation Council members swiftly condemned the strikes and placed blame on Iran. In retaliation, the United States carried out strikes against Iranian targets, prompting Tehran to launch counter‑operations against Bahrain and Kuwait. Former President Donald Trump subsequently declared that the memorandum of understanding signed between Iran and the United States is no longer valid.
This escalation underscores how the Strait of Hormuz now sits at the heart of the broader US‑Iran confrontation that erupted on February 28. While the conflict involves multiple theatres, disputes over the strait’s management have emerged as the most intractable obstacle in bilateral negotiations, with nuclear‑programme concerns increasingly sidelined.
The interruption of traffic through the Strait of Hormuz carries an immediate and substantial economic burden for Iran, its Gulf neighbours, and the global economy, which has been grappling with the most severe oil‑supply disruption in modern history for over four and a half months.
Iran’s leverage is also its liability
For Tehran, the Strait of Hormuz represents its most potent bargaining chip, yet it also imposes severe costs. Since the conflict erupted, Iranian forces have mined the waterway, attacked shipping, and reduced traffic by approximately 95 percent. The resulting disruption has been described by International Energy Agency chief Fatih Birol as “the largest supply disruption in the history of the global oil market”.
This leverage is genuine: roughly one‑fifth of global oil and one‑fifth of worldwide liquefied natural gas (LNG) transit through Hormuz, and no existing Gulf pipeline infrastructure can fully substitute for it.
However, Iran has effectively choked its own lifeline—and that of all other users. Iranian crude, previously priced about $3 per barrel below international benchmarks, now trades at a 20 percent discount. Oil exports fell by more than 90 percent in May as US naval patrols tightened pressure on Iran’s shadow fleet.
Even prior to the conflict, the World Bank forecasted a contraction of Iran’s economy in 2026. The repercussions of collapsed oil sales will be profound, given the closure of this critical chokepoint.
A 60‑day U.S. Treasury waiver issued on June 22, which allowed Iran to sell oil at full market rates until August 21, has now been rescinded following Tuesday’s attacks.
These economic pressures underpin Iran’s determination to assert joint authority over the Strait and introduce transit fees—for “service charges”—for vessels transiting the waterway. Washington has repeatedly emphasized that Iran lacks the legal basis to levy tolls in international waters governed by the United Nations Convention on the Law of the Sea’s transit‑passage provisions.
For Tehran, the dispute transcends modest toll revenue compared to its oil income; it is about establishing a precedent and asserting sovereignty over a chokepoint that constitutes its sole source of leverage once sanctions are lifted and frozen assets are released.
The issue is contested: Iran seeks an immediate release of half of an estimated $25 billion in frozen assets, a demand the United States resists. Additionally, a separate $300 billion reconstruction fund outlined in the MoU has become a contentious point within Washington.
The Gulf is paying for a crisis it didn’t start
For Gulf Cooperation Council states, the Hormuz crisis has compelled the development of alternative routing strategies. Saudi Arabia has diverted crude through its approximately 1,200 km (746‑mile) East‑West pipeline to the Red Sea port of Yanbu, while the United Arab Emirates has utilized the Habshan‑to‑Fujairah pipeline to the Gulf of Oman.
Collectively, these pipelines handle only a fraction of the volume previously moved through Hormuz—at best 7 million barrels per day on the Saudi line and under 1.8 million barrels per day on the Emirati line, compared with roughly 20 million barrels per day that transited the Strait before the conflict.
Both alternatives have also been targeted: Iranian strikes reduced the East‑West pipeline’s capacity by an estimated 700,000 barrels per day in April, while drone attacks disrupted loading operations at Fujairah. Sea‑borne crude exports from non‑Iranian Gulf states declined by roughly 50 percent between February and March.
Qatar, which hosts negotiations between Iran and the United States, has a direct stake: its entire liquefied natural gas (LNG) export sector relies on the Strait of Hormuz, prompting it to advocate vigorously for a settlement.
Oman, drawn into Iran’s sovereignty claim as a co‑owner of the Strait’s territorial waters, finds itself balancing commercial incentives for resolution against its legal stance as a signatory to the United Nations Convention on the Law of the Sea (UNCLOS), which rejects Iranian tolls. Meanwhile, Iraq, heavily dependent on its Gulf terminals, has quietly explored exporting oil northward through Turkey.
None of these alternatives are inexpensive, and each carries significant political and commercial implications that tie Gulf capitals’ economic fortunes to a settlement between the United States and Iran.
The rest of the world: Insurance bills and inflation
Beyond the immediate region, the crisis has spread primarily through two channels: price impacts and heightened insurance costs. Rising oil prices are transmitted to downstream consumer goods, restraining economic growth. Projections indicate that the global economy may decelerate to 2.8 percent in 2026, down from 3.4 percent in the previous year, owing to the Strait’s closure.
Transit insurance for Hormuz, previously around 0.25 percent of a vessel’s value, has surged to as much as 8 percent, pushing coverage costs for a single large tanker to $3 million‑$8 million. Major shipping lines such as CMA CGM and Hapag‑Lloyd have added conflict surcharges of $1,500‑$2,000 per twenty‑foot equivalent unit (TEU). The U.S. International Development Finance Corporation has stepped in as an insurer of last resort, offering up to $40 billion in reinsurance capacity to sustain vessel movements.
China bears the greatest share of this burden, importing nearly 40 percent of its crude through the Strait of Hormuz and purchasing over 80 percent of Iran’s oil exports, positioning it as both Tehran’s most critical customer and one of the conflict’s most exposed bystanders. Japan, which sources roughly 70 percent of its Middle Eastern crude via Hormuz, has already released strategic reserves to mitigate exposure.
For import‑dependent economies across Asia and Europe, the Strait’s status is far from a diplomatic abstraction; it directly influences fuel, freight, and fertilizer prices.
Although oil and gas dominate headlines, approximately 30 percent of global seaborne fertilizer shipments also traverse Hormuz.
The World Bank’s fertilizer price index has risen more than 12 percent in the first quarter of 2026 and reached its highest level since October 2022, largely due to the closure. The Food and Agriculture Organization has warned that resulting shortages of urea and other nitrogen fertilizers could depress crop yields during the 2026‑2027 growing season, disproportionately affecting import‑dependent, food‑insecure nations in Africa and Asia.
Unlike an oil‑price spike, which primarily affects pump prices, a fertilizer shortfall extends into subsequent harvests, implying that an unresolved Hormuz standoff will generate a slower‑moving but longer‑lasting economic impact than crude price shocks alone.
These calculations weigh heavily on both parties. An agreement that reopens the Strait of Hormuz without clarifying control risks recreating the instability that led to its closure, while conceding Iranian toll authority could set a precedent unacceptable to Washington and other shipping nations. Until a mutually acceptable arrangement is reached, the global economy remains priced for a chokepoint that neither side can fully afford to keep shut, nor fully agree on how to reopen.