Unless you're a geography enthusiast or have ties to the region, there's a better-than-average chance that you've never heard of the Strait of Hormuz. A strait is a small channel of water that connects to larger bodies; in this case, the Persian Gulf and the Gulf of Oman which connects to the Arabian Sea. Iran sits to the north of the strait and the United Arab Emirates to the south.

However, this small body of water has a large impact on world economies. It's the only waterway open to the oil rich countries of the Persian Gulf and with an average of 14 tankers holding 15.5 million barrels of oil passing through the strait each day, it's vitally important for the world's oil supply. Twenty percent of the world's oil passed through the Strait in 2011.

TUTORIAL: Commodities

Sanctions
The United States, along with other nations, have grown increasingly concerned that the Iranian nuclear program isn't as non-military as they claim. Iran's refusal to cooperate with United Nations mandates has forced nations to impose trade sanctions against them. On New Year's Eve, these sanctions were further tightened making it increasingly difficult for Iran to sell their oil.

China, one of Iran's biggest customers, has cut their purchases by more than half and EU countries have recently agreed to similar actions. These sanctions have caused the value of Iran's currency to plummet more than 40% and the even tighter sanctions will make the pressure on their economy even worse.

(For more on how trade restrictions and their subsequent effects on an economy, read The Power Of Economic Sanctions.)

Iran's Warning
In response to these sanctions, Iran has warned that if they can't sell their oil, other nations won't either. They've threatened to block the Strait of Hormuz, preventing oil from reaching the markets. The U.S. as well as the U.K. have pledged to take military action if Iran attempts to block the waterway.

The Effects at the Pump
If Iran attempts a blockade of the Strait of Hormuz, energy analysts believe that oil prices could rise as much as $50 per barrel in only few days, making prices at the pump well above $4 per gallon. Any long-term standoff could have severe economic effects to cash-strapped consumers forced to pay higher prices.

The likelihood of Iran following through on their threat is slim. Iran sends 2 million barrels of oil through the strait each day and any further disruption of their shipments would be catastrophic to their already weakened economy, according to Energy Department analysts. Second, Iran knows that economies all over the world would unite to keep the strait open in order to keep oil prices low. Moreover, Iran's Navy would be no match for the combined militaries of the world.

What may be most devastating is a slow escalation of the conflict causing oil prices to slowly move higher, as they have since the tension began. As insurance companies raise premiums for the tankers, oil companies pay higher wages for crews willing to take the extra risk and the market responds to the political tensions, Iran could accomplish its goals without an actual blockade. (For one insight into the causes of price fluctuations in what you pay at the pump, read What Determines Gas Prices.)

The Bottom Line
The oil market is very sensitive to events like these. Analysts believe that an actual blockade likely won't play out, but tensions may cause pump prices to rise in the short term.

Related Articles
  1. Home & Auto

    The Latest Airbags Recalls: What to Do

    The latest warnings are from Honda/Acura and Dodge. How to look up your car – and what to do if you find it on the recall list.
  2. Investing Basics

    The Importance of Commodity Pricing in Understanding Inflation

    Commodity prices are believed to be a leading indicator of inflation, but does it always hold?
  3. Economics

    What is a Complement?

    A good or service that’s used in conjunction with another good or service is a complement.
  4. Fundamental Analysis

    Performance Review: Commodities in 2015

    Learn how commodities took a big hit in 2015 with a huge variance in performances. Discover how the major commodities performed over the year.
  5. Stock Analysis

    6 Risks International Stocks Face in 2016

    Learn about risk factors that can influence your investment in foreign stocks and funds, and what regions are more at-risk than others.
  6. Retirement

    Ipsy Review: Is It Worth It?

    Discover the history of ipsy, how much packages cost, options available for membership, major competition and what the future looks like for the company.
  7. Investing

    3 Things About International Investing and Currency

    As world monetary policy continues to diverge rocking bottom on interest rates while the Fed raises them, expect currencies to continue their bumpy ride.
  8. Stock Analysis

    The Biggest Risks of Investing in SandRidge Stock

    Learn about the significant risks of investing in SandRidge. Read how the company may not be able to service its substantial debt load.
  9. Investing News

    Tufts Economists: TPP Will Reduce U.S. GDP

    According to economists at Tufts University, the TPP agreement will destroy half a million jobs in the U.S. by 2025.
  10. Stock Analysis

    The Biggest Risks of Investing in Johnson & Johnson Stock (JNJ)

    Learn the largest risks to investing in Johnson & Johnson through fundamental analysis and other potential risks. Also discover how JNJ compares to its peers.
RELATED FAQS
  1. How does a cost-of-living adjustment (COLA) affect my salary?

    Some companies build salary adjustments into their compensation structures to offset the effects of inflation on their employees. ... Read Full Answer >>
  2. Where can you buy NetSpend reload packs?

    You can only purchase NetSpend reload packs at Giant Eagle, Albertsons, Roundy's and Pathmark supermarkets. NetSpend cards ... Read Full Answer >>
  3. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  4. How do mutual funds work in India?

    Mutual funds in India work in much the same way as mutual funds in the United States. Like their American counterparts, Indian ... Read Full Answer >>
  5. Do hedge funds invest in commodities?

    There are several hedge funds that invest in commodities. Many hedge funds have broad macroeconomic strategies and invest ... Read Full Answer >>
  6. What does marginal utility tell us about consumer choice?

    In microeconomics, utility represents a way to relate the amount of goods consumed to the amount of happiness or satisfaction ... Read Full Answer >>
Hot Definitions
  1. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  2. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  3. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  4. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  5. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  6. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
Trading Center