About the author: Atty. Nena Radoc is a CPA-Lawyer-MBA with over 40 years of management experience in local and multinational companies.

In today’s interconnected world, a conflict in one region can affect economies across the globe.

The current war involving the United States, Israel, and Iran is a good example of how such a conflict might affect market economies through oil prices.

The key reason is geography—specifically, a narrow waterway called the Strait of Hormuz, which plays a critical role in the global energy supply.

One of the World’s Most Important Waterways

The Strait of Hormuz is a narrow body of water between Iran and Oman. It connects the Persian Gulf—where many of the world’s largest oil producers are located—to the Oman Gulf and the open ocean.

Through this passage, oil from major oil producers such as Saudi Arabia, Iraq, Kuwait, the United Arab Emirates, and Iran is transported by tanker ships to markets around the world.

What makes the strait so important is the huge volume of oil that passes through it. Experts estimate that about 20% of the world’s oil supply (about 20 million barrels of oil) moves through this narrow corridor every single day. Most of Asia's oil is transported through the strait.

A significant portion of the energy that powers cars, airplanes, factories, and power plants around the world depends on ships safely passing through this single waterway.

Any disruption to shipping in the strait immediately creates global energy worries and oil price hikes.  An estimated 30% of the world’s fertilizer requirement is being transported through the strait, most of it going to various countries in Asia.

Iran sits along the northern side of the strait and has strong military capabilities in the area. Iran has repeatedly threatened to strike ships it considers as not friendly, but even other ships do not want to take any risk. Mere threats can cause oil prices to rise.

First, oil markets react to risk and uncertainty. Traders begin to anticipate supply shortages and start buying oil in advance. This increased demand pushes prices upward.

Second, shipping companies and insurers become cautious. Tanker operators may avoid the area if they fear attacks or military confrontation. Insurance costs for ships traveling through the region may also increase dramatically. These extra costs eventually raise the price of oil.

Third, if fewer tankers pass through the strait, the global oil supply effectively shrinks. When supply decreases but demand stays the same, prices naturally rise.

What to do with the Strait

Iran has threatened to strike ships belonging to the US and their allies using the Strait of Hormuz, and has continued to mine the area.  This amounts to actual closure or blockade of the strait to oil transport, as oil ships do not want to risk the possibility of being attacked.

Because of the importance of the strait, Trump has asked countries like the UK, France, Japan, South Korea, and even China to send their navies and help reopen the strait to navigation. But most of these countries appear reluctant to get dragged into this war,  even if they have expressed willingness in finding a diplomatic solution to the problem.

 Iran has said that other countries not involved in the war are free to use the strait.  In fact, some ships belonging to China and India have been allowed to pass through the strait. This may provide some hope that there could be a more peaceful solution to the strait of Hormuz problem than military blockade or bombing.

Economic Impact of Rising Oil Prices

Oil is often described as the “lifeblood” of modern economies. Almost everything we use—food, clothing, electronics, and construction materials—depends on transportation powered by fuel.

As oil prices rise sharply, it creates severe ripple effects. Higher fuel prices. Gasoline and diesel become more expensive because they are refined from crude oil. Airlines, shipping companies, trucking firms, and public transportation operators all face higher costs.

Higher inflation. As transportation costs increase, manufacturers and distributors will naturally pass on the added expenses to consumers. This means groceries, household goods, and many other products become more expensive.

Slower economic growth. When energy costs rise significantly, businesses may reduce production and consumers may cut back on spending, slowing economic growth.

Financial market uncertainty. Stock markets and currencies can become volatile when investors worry about the economic impact of rising energy prices.

Why Asia Is More Vulnerable

Many Asian economies depend heavily on oil imported from the Middle East. Countries such as China, Japan, South Korea, India and the Philippines receive large shipments of oil that travel through the Strait of Hormuz.

Since it is a major manufacturing hub for the world, higher energy costs in Asia can eventually affect global prices of many products.

Keeping the Strait of Hormuz open again to all oil tankers is therefore very important. If this does not happen soon, some critical changes need to be implemented, such as increasing the production of other major oil producers and finding alternative pipelines bypassing the strait.

In the short term, countries with large reserves of oil will need to continue releasing part of their reserves to augment world supply.  The US has also lifted oil trade sanctions against Russia temporarily, much to the chagrin of its NATO allies, which fear that it may provide Russia with an economic impetus to finance its war against Ukraine.

 Indeed, the war in Iran and the short, narrow Strait of Hormuz could create havoc not only in the Middle East but also in Asia and the rest of this interconnected world.