Dire Strait

Standoff at the World’s Oil Chokepoint

  • The Iranian regime continues to demonstrate both its intention and its capability to carry out drone and missile strikes across the Middle East.
  • Iran has successfully blocked the Strait of Hormuz to all but a handful of vessels. About 25 percent of the world’s shipborne oil normally travels to market via the Strait.
  • Globally, oil prices are in a state of flux, especially in Asia, which is heavily reliant on oil deliveries via the Strait of Hormuz.
  • Increasing oil prices will have significant knock-on effects, including on global food prices and availability. Sustained uncertainty in an already soft global economy could trigger a recession.
  • To alleviate oil shortages, the International Energy Association released 400 million barrels from its emergency reserve. This accounts for about four days of global demand.
  • Canadians and Canadian assets, including military support and peacekeeping personnel are in harm’s way in Kuwait and in Southern Lebanon.

The War So Far

What US President Donald Trump characterized as a “little excursion…to get rid of some evil” in the Middle East is now into its fourth week. Iran is still standing, and the popular uprising foreseen by the United States has not happened. Instead, Iran’s supreme leader, Ayatollah Ali Khamenei, killed on February 28 by an Israeli airstrike, has been replaced by his son, Ayatollah Mojtaba Khamenei, although some analysis assesses that both the war and Iran are now being run by the Iranian Revolutionary Guard Corps (IRGC). Whoever is in charge, the Iranian regime has demonstrated both its intention and its capability to strike multiple targets across the region, including US and Israeli targets, with drones and missiles of its own.

Ground Zero

If there is a strategic ground zero in this war, it is the Strait of Hormuz, a waterway that separates the Arabian Peninsula and Iran, and connects the Persian Gulf with the Arabian Sea. About 55 kilometres wide at its narrowest point, it has an inbound and an outbound shipping lane, each less than 4 kilometres wide. In 2025, about 20 million barrels of crude oil and oil products a day travelled through the Strait, 80 percent of it enroute to Asia. This represents about 25 percent of the world’s shipborne oil. Iran, Iraq, Kuwait, Qatar, and Bahrain are almost totally reliant on the Strait to move their oil to world markets. 
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Strait of Hormuz


During the second week of what is now a full-blown war, President Trump took to Truth Social to announce that, “if Iran does anything to stop the flow of oil within the Strait of Hormuz, they will be hit by the United States of America TWENTY TIMES HARDER than they have been hit thus far.” But now, Iran has succeeded in effectively blocking the Strait to all but a handful of vessels, deploying a combination of rockets, drones, fast-attack boats, and, by all indications, naval mines. And after a devastating March 18 Israeli attack on the South Pars gas field, which supplies around 70 percent of Iran’s natural gas, Iran attacked petroleum and liquefied natural gas (LNG) facilities in Saudi Arabia, Abu Dhabi, and Kuwait. Qatar announced that Iranian attacks have destroyed 17 percent of its LNG export capacity, amounting to $20 billion in lost revenue.

Flip-Flops and Paper Tigers

Meanwhile, in a conflict that has been characterized by contradictory messages and tactical flip-flops, the US administration has stated that keeping the Strait open would be up to “other nations.” Shortly afterwards, the President lashed out at NATO “cowards” for their reluctance to deploy naval escorts for ships transiting the Strait of Hormuz, saying (in language recalling the Chinese Cultural Revolution) that “without the USA, NATO is a Paper Tiger.”  This posturing, which is in keeping with the administration’s obvious disdain for America’s traditional allies, is also a rhetorical smokescreen. On March 10, Senator Chris Murphy, who sits on the Senate Committee on Foreign Relations observed that “they don’t know how to get the…[the Strait]…safely back open. Which is unforgivable, because this…was 100% foreseeable.”

Going Up: Global Oil Prices

Foreseeable or not, the economic and financial consequences of this war are making themselves felt. Market analysts were initially optimistic, seeing the US / Israeli attacks on Iran as a temporary regional flare-up, especially given the US administration’s premature assurances that the Iranian regime would collapse within a few days. And it is true that in the early weeks of the war, Brent Crude (BC), a petroleum industry benchmark, was trading at between $100 and a high of $120 per barrel, after remaining relatively steady at around $70 to $80 per barrel through 2025. West Texas Intermediate Crude (WTI), another industry benchmark, saw similar fluctuations, but is now trading at just over $90 per barrel. These are significant increases, but not unsustainable, at least over the short term. North American and some European oil and gas prices tend to be driven by fluctuations in the BC and WTI indices.

Other indicators paint a much more worrisome picture. Since the closure of the Strait of Hormuz, for example, Kuwait Export Blend (KEB) is trading at around $163 per barrel, up from around $60 per barrel at the end of February 2026. Kuwait is a major supplier of oil and petroleum products to India, Pakistan, and East and Southeast Asia and a price increase of more than 170 percent is not sustainable, even for China which, in 2024, spent almost $10 billion to keep itself in Kuwaiti oil.

Canaries in the Coal Mine?

There are already indications that the combination of supply shortfalls and increased costs are affecting the entire region. On March 22, Australian Energy Minister, Chris Bowen, announced that six tanker-loads of oil from Southeast Asia had been cancelled or deferred. Australia imports most of its petroleum products from Southeast Asia which, as above, is heavily reliant on oil originating in countries currently affected by the Iranian blockade. The government of Australia has reassured its citizens that there are no fuel shortages in their future. Nevertheless, “hundreds” of Australian service stations began running out of fuel on March 23. In the Philippines, government employees have been cut back to a four day work week and other Asian countries, including Sri Lanka, India, Pakistan, and Myanmar have implemented strict domestic and vehicle fuel rationing. 

Emergency Oil Reserves: Finite By Definition

Not everybody has been taken by surprise. On March 11, as the potential impact of oil supply disruptions started to become clearer, the International Energy Agency (IEA) announced that it would release million barrels of oil from its emergency reserve, which is made up of the strategic reserves of IEA member states (mostly highly industrialized OECD nations). This is the largest emergency release in the agency’s history, more than double the 183 billion barrels unlocked to relieve shortages in the aftermath of Russia’s invasion of Ukraine in 2022. The IEA emergency reserve is not a long-term solution to sustained shortages and rising prices, however. Four hundred million barrels accounts for about four days of global demand, and the reserve itself comprises about 1.2 billion barrels. If this crisis continues, countries whose oil supplies are part of the emergency reserve may become increasingly reluctant to contribute to any subsequent release. 

It is worth noting that as a net exporter of oil, Canada does not maintain a strategic reserve, even though it is an IEA member state. If, for whatever reason, Canada needed to draw on, say, US strategic reserves as a temporary measure, Aesop’s fable of the industrious ant and the carefree grasshopper might apply.

Why Is This Important?

As above, the most immediate impact of the slowdown in the global movement of oil products is on consumers, including businesses, at the gas pumps. With their reliance on shipments via the Strait of Hormuz, Asian countries are especially hard hit, with price increases as high as 68 percent. Canada has seen the cost of fuel rise by up to 30 percent and in the United States, gas prices are up by around 17 percent. 

But economic impacts go far beyond gas price sticker shock. For example, petroleum byproducts are critical to the manufacture of agricultural fertilizers. With farming season well underway in the South and about to commence in the North, increased prices for fertilizers and agricultural chemicals will be felt in increased food prices and supply issues and in particularly hard-hit regions, food shortages and even famine. As discussed in previous CIBs, the almost complete withdrawal of the United States from international aid programming and delivery can only exacerbate these kinds of problems. More broadly, increased costs for food and food delivery in an already soft global economy could trigger a global recession. And pressure to increase interest rates in order to address inflation could drive already beleaguered borrowers beyond their capacity to respond.

On March 24, President Trump ordered the deployment of 2,000 elite US troops to an unspecified location in the Middle East. Whether this signals the opening stages of ground operations or is intended as a negotiating tactic is unclear. But negotiations are unlikely to result in any immediate solution, and the potential impact of ground operations range from an Iraq-style quagmire to the eruption of the entire region. So, the current standoff over the Strait of Hormuz could continue into the foreseeable future, with geopolitical and economic turmoil increasing proportionately. And even as Canada struggles with its response to all this, hedging our support for outcomes that are by no means clear, Canadians and Canadian assets are in harm’s way. The Canadian Armed Forces Operational Support Hub for Southwest Asia is in Kuwait, and Canadian military personnel are deployed with the United Nations Interim Force in Southern Lebanon. 

One month ago, chief IRGC spokesperson Ali Mohammad Naini (killed on March 20 by an Israeli airstrike) warned that “Iran will determine when this war ends.” So far, the odds seem to be in his favour.