The Strait of Hormuz and Its Impact on Global Oil Prices

Abstract Hormuz Strait is one of the most important energy passages in the global economy, which is used to transport about one-fifth of the global energy consumption of petroleum. The paper under review discusses the two-way interdependence between the geopolitical processes in the Strait of Hormuz and global oil prices. The research uses time-series econometric analysis with geopolitical risk indices to assess the effect of supply upheavals, military tensions, and strategic posturing in the area on the volatility of prices in global crude oil markets. The study uses secondary sources of information about the large energy agencies and financial institutions between the year 2000 and 2024 and uses Vector Autoregression (VAR) and GARCH, to understand both short term shocks and long-term volatility regimes. These findings indicate that the geopolitical instabilities of the Strait have significant impacts in increasing the uncertainty of oil prices and great spillover impacts on the global energy markets, inflation, and trade balances, particularly in the developing economies which are significant oil importers. Moreover, the research indicates the asymmetry of market reactions, in which the interpretations of threats of disruption have more significant price impacts as compared to the actual supply disturbances. Policy implications are set on the diversification of energy supply lines, strategic oil stockpiles and cooperation in international maritime security. The paper adds to the body of knowledge on energy security and geopolitical risk by providing an extensive empirical evaluation of the impact that one maritime chokepoint may have in determining the economic stability in the world, which is becoming more interconnected.