A Closed Strait of Hormuz Was Once Unthinkable

Why It Matters

A closed Hormuz would shock global energy markets, driving price spikes and testing the resilience of supply chains that were never modeled for such an event. Understanding this risk is critical for policymakers, investors, and companies navigating heightened geopolitical volatility.

Key Takeaways

• 2007 and 2022 exercises dismissed full Hormuz closure as unrealistic
• Closure could affect roughly one‑fifth of global oil and LNG flow
• Experts invoke Weitzman's dismal theorem for extreme, low‑probability risks
• U.S. less dependent on oil, now top producer of oil and gas
• Cheap drones raise new threat to large tankers in the strait

Pulse Analysis

The Strait of Hormuz has long been recognized as the world’s most critical energy artery, funneling roughly one‑fifth of daily oil and liquefied natural gas exports. Yet, major risk‑assessment exercises in 2007 and again in 2022 deliberately excluded a total shutdown, labeling it “uncredible” and “alarmist.” This blind spot mirrors the economic version of Martin Weitzman’s dismal theorem, where extreme, low‑probability events are omitted from standard models. Consequently, energy ministries, the International Energy Agency, and private analysts have operated without a playbook for a scenario that could upend global supply.

The current disruption, which has pushed Brent crude from $100 to $126 a barrel within weeks, forces a reassessment of those assumptions. TotalEnergies’ CEO Patrick Pouyanné admits the strait’s navigability was underestimated, while U.S. analysts note that domestic production and stricter fuel‑efficiency standards have reduced America’s oil vulnerability. At the same time, advances in inexpensive drone technology give hostile actors the ability to damage super‑tankers, raising the probability of a forced closure. Markets are reacting, but the broader economic shock could be far larger if the blockage persists.

Policymakers now face pressure to integrate extreme‑event modeling into energy security strategies. A coordinated approach that bridges military threat assessments, climate‑risk frameworks, and IEA reserve planning could close the current gap. Investors should monitor companies’ contingency disclosures and the pace of diversification into alternative fuels, as prolonged Hormuz constraints would accelerate demand for non‑Middle‑East supply. Ultimately, acknowledging the dismal‑theorem risk and preparing for a worst‑case Hormuz shutdown will be essential to safeguard price stability and prevent a repeat of the 2007 oil price surge.