Why is the Strait of Hormuz Important?

free essayThe Strait of Hormuz experiences the passage of ships that carry about 16 to 18 million barrels of oil and not less than 2 million barrels of petroleum products. This is about 40 per cent of all the oil and petroleum products traded in the international market. According to Bumiller, Schmitt & Shanker (2012), this means that the view of the Strait of Hormuz in any direction is usually full of shipping. As a result, it is evident that any considerable disruption of the shipping activities in the Strait would lead to immediate effect on the global economy. This sharply affects both energy prices and supplies. From this perspective, it is extremely important for the nations bordering the Strait or controlling it not to disrupt the flow of goods through it. The Strait of Hormuz is bordered by three countries. Oman and the United Arab Emirates border it on the south, whereas Iran borders it on the north.

Though it presents a possible conflict between international powers and the competing regional nations, the Strait of Hormuz links the Persian Gulf with the Arabian Sea (Harding 2012). The Strait is strategically significant and presents one of the main marine choke points in the entire world, being about 50 kilometer at its shortest point. According to Harding (2012), the Strait of Hormuz is of strategic significance for this reason because it is the only one naval way to deliver oil from Iraq, Kuwait, Bahrain, Qatar, Saudi Arabia, and Iran. In addition, most of the oil from the United Arab Emirates may also be transported through the Strait of Hormuz. Significant volumes of this oil are transported to Western Europe, Japan, and the United States. These three nations have a pivotal interest in protecting the free passage via the Strait of Hormuz.

According to Hunter & Gienger (2012), the Strait of Hormuz links Persian Gulf to both the Arabian Sea and the Gulf of Oman and it represents one the most significant oil chokepoints. Approximately not less than 14 million barrels of oil are exported each day. The United Arab Emirates, Iran, and Oman border the Strait and all of them play a crucial role in promoting a secure environment around the region. The United Arab Emirates and Oman are facilitated by the US which ensures their safety by keeping a naval carrier task force in the Persian Gulf region. In addition, the United States supplies these countries with a lot of arms, including advanced fighter airplane. Allegedly, the main goal of Iran is a big amount of oil passing through the Strait.

Oil is one of the world’s major energy sources and it will continue being such for the near future. The international need for oil as a source of energy will continue increasing because developing countries, including India and China, and developed countries such as the US and the UK increase their oil use (Smith 2012). This implies that the Strait is partly a backbone of the world’s greatest economies. As such, the closure of the Strait would significantly cripple international trade. In future, the accessibility to this waterway will be extremely vital since 66 percent of the world’s oil reserves belong to the Arabian Gulf region. In addition, the accessibility to this region will be vital because of the fact that now there are not many alternatives to export this oil out of the Arabian Gulf besides the Strait of Hormuz. According to Bumiller, Schmitt & Shanker (2012), there are only two pipelines in Saudi Arabia that are able to transport oil. The United States receives 12 percent of its oil from this vital waterway, whereas Japan and Western Europe get about 66 and 25 percent of their oil, respectively. Most importantly, 15 per cent of the world’s commerce is routed via the Strait of Hormuz and any disruption by the anti-western regimes or any other country would destabilize the economy of the world.

As the demand for energy continues growing, various factors could interfere with the presence of the supplies of energy from this region. The first factor is the competition among the neighboring nations over the current, new or expected resources of energy that might increase the tensions. The second factor is the heightened concentration of production of oil in this area and the declining capability of OPEC to regulate production and pricing quotas. This threatens the economies stability of some the nations who solely depend on revenues from oil trade (Harding 2012). Several regional problems among the primary participants, including UAE, Oman, and Iran, have also crippled international trade. For instance, there is a controversy over the Greater and Lesser Tunb Abu Musa islands at the mouth of the Strait of Hormuz. In 1971, Iran occupied the islands with continued mediation and military forces. As a result, countries such as Oman have failed to come to any peaceful settlement, Therefore, it affected logistics services in the region (Blecker, Kersten & Herstatt 2007).

The Impact its Closure Would Have on the GCC Countries

Since the first development of maritime trade, the Strait of Hormuz has been one of the significant waterways (Hunter & Gienger 2012). This implies that if one can go back to ancient history, or the clay tablets speaking about the great historic empires in this global region, he or she will find out that the Strait of Hormuz enabled trade for the entire region. During the old days, the Strait of Hormuz serviced a wide range of trade and supported communities that lived along the adjacent hinterlands. The Strait of Hormuz provides assistance to the adjacent countries by supporting agricultural activities. Historically, the Strait of Hormuz was used to transport fruits, wines, grains, wool, copper, and wood. Nothing in the ancient trade came almost close to the significance of the modern transportation of oil via the narrow passage. This implies that the Strait of Hormuz is now even more significant than ever. It is due to the fact that the world’s most precious commodity, oil, is transported through the narrow passage (Harding 2012). The closure of the Strait of Hormuz implies imposing some difficulties on the movement of goods in and out of the Gulf region. This is likely to cause more logistics issues related to world politics that will affect trading activities between Gulf countries and other parts of the universe.

Nations in the Gulf are seeking to decrease their dependence level on the United States (Hunter & Gienger 2012). The possibility for conflict over the Strait of Hormuz and resources traversing is high. The anti-western governments of Iraq and Iran tend to strongly oppose the security support that the United States offers for several Gulf States and the presence of the United States within the Persian Gulf. If the conflicting nations could start a war in this region, it is apparent that oil would be used as a weapon. As a result, environmental effects could be extremely disastrous. According to Smith (2012), there would be severe threats to marine life, the economies of these countries, and local water supplies. As a result, containing conflict within this region has been an objective of all the regimes involved. Therefore, they have been successful in preventing the occurrence of any major incident.

According to Harding (2012), blocking the Strait of Hormuz or threatening to do so will apparently have great effects on the GCC nations. The most prominent effect will be the increase in oil prices. It is due to the threat to block the Strait tends to coincide with winter, a season in which oil demand reaches the highest record level. According to Blecker, Kersten & Herstatt (2007), this will result in significant damage to the international economy and heighten the cost of importing feedstock and necessary commodities. As a result, this will affect the balance of payments of Gulf countries and cause the overall exhaustion of their already exhausted budgets.

The Impact of the Closure on Those Countries Importing From the GCC Countries

The closure of the Strait of Hormuz will also affect nations importing from Gulf nations. The closure implies that no goods will be moved out through the Strait, which is one of the major waterways of the world (Bumiller, Schmitt & Shanker 2012). The world’s most precious commodity, which is oil, will not be transported through the Strait of Hormuz. This will affect the demand and supply of goods imported from Gulf nations, especially oil given that the region produces the significant amount of it. The increased demand of these goods will have an effect on world prices of these imports. Since the fluctuations in oil prices have the tendency of increasing the prices of other goods, countries importing from Gulf nations will significantly suffer from the closure. There are two scenarios related to the closure of the Strait of Hormuz: worst-case scenario and the “Tanker War” scenario. In the worst-case scenario, the Strait of Hormuz will be completely blocked via the sinking of oil tankers, or the use of mobile missiles, speed boats, and rocket propelled grenades. In this case, no goods will be transported through the strait. This implies that no country will import goods through the Strait of Hormuz. In the case of the “Tanker War” scenario, various forms of aggregation are practiced in order to disrupt the oil trade. This will therefore result in the increase of prices for oil and other commodities imported from this region. This will favor nations such as Iran (Bumiller, Schmitt & Shanker 2012).

Logistics Related Services

The excellent geographic location and perfectly good accessibility by land, air, and sea of the GCC nations have brought it to the top of the agenda for international logistics. According to Blecker, Kersten & Herstatt (2007), the continuous growth of international trade requires effective logistics and transport structures. Therefore, from a global view, the gulf region has a set of three significant opportunities. The first opportunity is the growth of volume in the trade between Asia and Europe. Since Asia has become a major manufacturing region for the entire world over the previous decade, trade volumes have considerably increased in both sea and airfreight. The airfreight services have traditionally stopped over in the Middle East which is halfway along the lane of trade in order to refuel. Therefore, airfreight services maximize freight load on their aircraft. According to Bumiller, Schmitt & Shanker (2012), airfreight growth on the lane of trade translates in stopover traffic. However, this is not true for the majority shipping volume, which is transported through freight services and does not need a stopover.

Another logistics-related service demanded by importing parties to the GCC countries is linked to the second opportunity the Gulf region should explore. The second and most significant opportunity the Gulf nations should consider is the volume growth on Asia Europe lane of trade. According to Bumiller, Schmitt & Shanker (2012), this is because shippers deploy larger vessels and apply extremely advanced concepts of logistics. The factors are influencing the need for hubs along the lanes of trade, and making them more favorable for that hub to be right in the middle. According to Harding (2012), there are essentially two logistics concepts around to organize optimal unloading and loading runs for vessels. In the first place, the vessel can make a milk run along a combination of different ports in the originating region, then make long distance journey to the destination region, and finally, do the same milk run in the destination region. This requires the vessel to stop at various ports. This has the effect of increasing loading time and port-handling fees at every stop. According to Bumiller, Schmitt & Shanker (2012), though this might be the most cost-effective approach for small volumes and smaller vessels, another concept of logistics known as the hub-and-spoke is the most favorable as the vessel sizes and volumes increase. In the hub-and-spoke model, the volume from one point of origination is loaded into a vessel regardless of its destination and then transported to a central node. In the node or the hub, the freight to different points of destination is loaded and grouped. In relation to the Europe-Asia trade, both regions are multi-centered and have a wide portfolio of airports and seaports. As a result, if the volumes and vessel sizes attain certain size of threshold, the hub-and-spoke approach is the appropriate logistics service to attain cost-effective transport (Harding 2012).

Another logistics service is the return or reverse logistics. To increase sales as well as market share, various businesses advertise that their goods will perform over a certain period. As such, the client is made to believe that in case he or she buys the product of that company, he or she is assured of satisfactory performance (Bumiller, Schmitt & Shanker 2012). Such products require to be brought back to the company in order to confirm good customer service. Reverse logistics service can be significant in recalling substandard or defective goods from the market.

Military services are also crucial in the transportation of goods and services in the Strait of Hormuz. According to Blecker, Kersten & Herstatt (2007), military logistics refers to the science and art of planning and carrying out the maintenance and movement of military forces. In their comprehensive sense, military operations deal with development, design, acquisition, distribution, maintenance, evacuation, and disposition of material.

Third party logistics services are also required in this region. According to Hunter & Gienger (2012), third party logistics services refer to business offering various logistics related services. Forms of third party logistics services include warehousing, transportation management, contract warehousing, freight consolidation, and distribution management. Third party logistics providers might take over all storage, receiving, shipping, value-added, transportation responsibilities, and shipping for a client and conduct them in the 3PL’s warehouse using the 3PL equipment.

Besides 3PL services, there are also fourth party logistics. According to Blecker, Kersten & Herstatt (2007), fourth party logistics services refer to the integration of supply chain that assembles and manages capabilities, technology, and resources of an organization. Suppliers and big organizations have traditionally been fulfilling demand by speedier transportation solutions, and increased inventory. Presently, suppliers need to fulfill the increased demands because of e-procurement, virtual inventory management, complete supply visibility, and requisite integrating technology.

Alternative Routes

Located between Iran and Oman, the Strait of Hormuz links the Gulf of Oman and the Arabian Sea with the Persian Gulf (Bumiller, Schmitt & Shanker 2012). The Strait is one of the world’s most significant oil choke point. However, despite the significance of the Strait of Hormuz to the international trade, Iran has occasionally threatened to close the Strait. According to ROOO, the Millennium Challenge 2002 was a key war game exercise that was conducted by the US armed forces. This challenge simulated Iran’s attempt to block the Strait. The results and assumptions of this closure were controversial. Various international security articles have also concluded that Iran could impede or totally close the Strait, and the US attempt to reopen the Strait would likely result in a conflict. In late 2011, Iran navy started a ten-day operation in international waters along the Strait of Hormuz. Various authors have also claimed that attempts to raise tension in that region of the world are counter-productive and unhelpful. From this perspective, alternative routes have been established to import and export products to the Gulf countries. Alternative shipping routes have been set up to address these logistics problems resulting from global politics and geographical issues. For instance, various oil pipelines such as the Iraq Pipeline through Saudi Arabia (IPSA) have been reopened by Saudi Arabia (Blecker, Kersten & Herstatt 2007). This pipeline stretches from Iraq through Saudi Arabia to the Red Sea. It is assumed that the pipeline has a capacity of about 1.65 billion barrels each day. The United Arab Emirates have also began deploying new pipeline routes from the Habshan to the Fujairah oil terminal in Gulf of Oman, which efficiently bypasses the Strait of Hormuz. However, other export or import goods apart from oil seem to have few alternative routes to get into and out of the Gulf region. This has increased the need for logistics services such as hub-and-spoke.

Air transport can be used in various routes, especially when transporting goods from other continents (Bumiller, Schmitt & Shanker 2012). Persian Gulf region has some of the most known airlines in the world, including the Iranian Airlines and the Fly Emirates. The Fly Emirates operates more than 3000 flights each week across its routes of 132 destinations in more than 78 nations from its hub in Dubai. The air transport services provided by these airline companies in this region can be a solution to the conflict concerning the closure of the Strait of Hormuz. Goods and services can be imported into this region through air transport before being distributed by roads.

Road transportation services play a crucial role in addressing the political logistical issues associated with the Strait of Hormuz (Harding 2012). It is important to note that road transports links the other forms of transport such as air and sea transport. Inland distribution of goods and services can be effectively achieved through road transport. The Persian Gulf region has some of the best road infrastructure in the world. For instance, the roads in UAE range from 2-laned to 8-laned roads. The mainland routes significantly rely on road transport. Goods imported from other parts of the region can be transported by sea to the nearest seaports, located outside the Persian Gulf such as Muscat before being distributed by road to different clients. This will prevent the conflicts linked to the Strait. As a result, the closure of the Strait will not have a significant impact on international trade. Logistics services such as warehousing and customs clearance can be required at seaports and airports. This is because they are the places where goods leave and enter the Persian Gulf (Bumiller, Schmitt & Shanker 2012).

Required Resources in Providing Logistics Services

The distribution of resources requires various resources in achieving the logistical function of the company. Logistics is one of the business activities that also require resources such as labor, finances, and assets. Labor or human capital refers to a collection of capabilities, knowledge, personality and social attributes that are embodied in the capability to perform labor in order to produce economic value. Warehouse management and custom clearance are some of the logistics services that require human resource. Various scholars have also argued that human resource is the most valuable resource of an organization. This implies that logistics companies should motivate employees in order to maximize their output.

Finance is a crucial resource in providing the above-discussed logistics services. ROOO defined financial resources as the money available to the organization for spending in form of liquid securities, cash, and credit lines. Before performing any logistics activity, company needs to secure adequate financial resources to be capable of operating sufficiently and effectively.

Short Term Safeguards

The solution to averting an ecological disaster is to diffuse both international and regional tensions, which might cause an environmental mishap. There are various ways that can be used for this purpose (Bumiller, Schmitt & Shanker 2012). The first key and maybe the simplest safeguard is finding an alternative route for transporting goods out of the Gulf. This might considerably decrease the tensions over the Strait of Hormuz since its international strategic importance would be reduced. Western nations can use Saudi Arabia, which a friendly nation to the United States. Saudi Arabia links some of the GCC nations to the Red Sea. As much as this would significantly reduce the tension, it is uncommon with various GCC countries.

The second short-term safeguard is settling of disputes between UAE, Iran, and Oman. Oman has frequently sought good relations with the United Arab Emirates and attempted to mediate its Island dispute with Iran. According to ROOO, Iran has a practical policy toward maintaining good relations. The Unite Arab Emirates has been willing to negotiate with Iran over their return to calm any fears from Iran. A decrease in forces by the United States might certainly calm Iranian fears of the US intervention. There is a possibility of conflicts in this region if the conflicts are not settled.

Conclusions and Recommendations

In order to attain supply chain merit, it is significant to relentlessly assess the alternative cost-reducing strategies, which allow competitive advantage. Some of the factors to consider when selecting logistics strategy include speed, non-stock, third party services, hub-and-spoke, facility consolidation, and inbound and outbound logistics among others. With regard to speed, the company should have a logistics strategy that handles fast moving goods differently from medium and slow moving goods. In relation to non-stock, the company should have a clear comprehension of all the elements and lost profit opportunities for goods deemed non-stock. With regard to third party services, the business or company should have its own facilities for distribution. Despite having an effective logistics strategy, the distribution chain of a company might experience challenges resulting from political, geographical, social, and environmental issues. A typical example of such companies comprise of those that use the Strait of Hormuz. Blocking the Strait of Hormuz or threatening to do so will apparently have great effects on the GCC nations. The increase in oil prices will be the most prominent effect. The closure of the Strait of Hormuz will affect nations importing from Gulf nations. The closure suggests that goods will not be moved out through major waterway of the world. In order to import and export products to the Gulf countries alternative routes have been established.