The price of oil is down about 50% from its most recent high. That's primarily due to robust oil production around the world, which has been met with less than anticipated demand. This is causing pain for oil producers while providing needed relief for oil consumers. However, this trend could reverse very quickly if a problem were to occur, such as a shipping accident, natural disaster, military conflict or terrorism, at one of the world's seven critical choke points along the major supply routes for oil. Here's a look at these choke points that if blocked could cause a super spike in the price of oil as it would cause major supply disruptions within the market.
Source: U.S. Energy Information Administration.
No. 1: The Strait of Hormuz
Separating the Persian Gulf from the Indian Ocean, the Strait of Hormuz is one of the most critical supply routes for global oil. That's due to the fact that nearly a quarter of the world's oil is produced in the Persian Gulf. Overall, 17 million barrels of oil per day pass through the Strait, or roughly 20% of daily global oil consumption and 35% of oil traded by sea.
Satellite image of the Strait of Hormuz. Photo Credit: Jacques Descloitres | NASA.
The biggest threat to the Strait comes from Iran, which has threatened to shut down access to the Strait in the past. In fact, just a month ago it held military exercises in the Strait and fired missiles and attacked a scale replica of a U.S. aircraft carrier. It has been estimated by analysts that if Iran did decide to shut down the Strait it could cause the oil price to skyrocket to upward of $200 per barrel.
No. 2: Strait of Malacca
Next up in strategic importance to the oil industry is the 500-mile long Malacca Strait, which is a narrow passage between Malaysia and the Indonesian island of Sumatra. It goes from the Indian Ocean to the South China Sea and at its narrowest point it's only 40 miles wide. About 15.2 million barrels of oil and petroleum products per day pass through this strait making it the second most important passageway for oil. It's even more important to the global LNG market as two-thirds of internationally traded LNG pass through the Malacca Strait. The waterway is vitally important to Japan and South Korea as 80% of the oil imported by both nations pass through this Strait while 40% of China's oil passes through the narrow passageway. It's a known playground of pirates while terrorists have been reported to be making plans to seize and blow up an oil tanker in an effort to shut down the Strait.
Nos. 3 and 4: Suez Canal, the SUMED Pipeline and the Bab el-Mandeb Strait
The Red Sea is home to another key oil shipping route and two key choke points. At the bottom of the sea is the Bab el-Mandeb Strait, which is between Yemen and Africa and through which 3.8 million barrels of oil and petroleum products flow each day. It's currently roiling the oil market as Yemen's civil war draws in regional rivals causing the oil price to spike with the growing risk that this key oil chokepoint could close.
Then to the north is the Suez Canal and the SUMED pipeline. Combined these carry 4.5 million barrels of oil and petroleum products per day. The Suez is also a major shipping route for global LNG. Because of their strategic importance both areas are at risk from terrorism as well as piracy.
No. 5: The Danish Straits
A series of channels that connect the Baltic Sea to the North Sea are known as the Danish Straits. It's a key shipping lane for Russian oil with an estimated 3.3 million barrels of oil and petroleum products flowing through these Straits each year. For the most part these straits are rather safe from region conflict, terrorism, and piracy. But because most of the oil that passes through here originates in Russia, it is a possible choke point that the West could use if it ever decided to put additional economic sanctions on Russia to include prohibits on oil exports.
No. 6. The Turkish Straits
Dividing Europe from Asia the Bosporus and Dardanelles waterways are another key oil shipping lane for Russian oil as well as oil from Azerbaijan and Kazakhstan. Each day around 2.9 million barrels of oil and petroleum products pass through the region. Only a half mile wide at its narrowest point the Turkish Straits are among the most difficult to navigate. It's also one of the busiest shipping routes in the world as 48,000 vessels pass through the straits each year. Because so much traffic passes through the biggest risk is bottlenecks that slow down the flow of traffic leading to an even bigger risk that a major accident could cause a huge backlog of traffic. Meanwhile, both sides of the straits are controlled by Turkey meaning it controls who passes through so any future uprising in the country could potentially shut down this key waterway.
An oil tanker passing through the Bosphorous. Source: Flickr user Shankar S.
No. 7: The Panama Canal
The last of the seven critical choke points is the Panama Canal. It's by far the least strategically important to global oil trade as less than a million barrels of oil flow through the canal each day or just 1.4% of globally maritime oil flows. Further, most of that oil isn't destined for the U.S. as 78% of it is going southbound from the Atlantic to the Pacific.
A big reason why the Panama Canal isn't all that strategically important to the oil market is because most modern oil tankers are too big to travel through the canal with some being five times larger than the maximum capacity of the canal. This is one reason why the canal is currently expanding its capacity so that a fully loaded Afamax tanker can pass through. Once that expansion is complete this year it could increase the flow of oil through the canal.
Investor takeaway
At the moment the oil market is worried about a supply glut and tepid demand. However, it tends to go from abundance to shortage rather quickly and one of the quickest ways the market could run short of oil is if one of the key oil trade routes is blocked. It's a risk that could one day send oil prices surging and take oil stocks up with it.
