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Tensions in the Middle East are mounting as war rages in Gaza. There is, as always, potential for Israel’s enemies to threaten the vital Gulf shipping route through the Strait of Hormuz. This would put pressure on an oil price previously suffering little impact from the conflict.

So far, maritime hostilities have been advance west. Yemen’s Houthis, who are backed by Iran, attacked a US warship and three commercial vessels at the weekend.

Western powers are protecting the Gulf with such assets as the US aircraft carrier Dwight D. Eisenhower. The Strait of Hormuz is just 20 miles wide at its narrowest point and dotted with islands controlled by Iran. About one-fifth of the world’s crude oil and liquefied natural gas flows through the strait daily.

It closed twice before, in 1973 and 1979. Crude oil prices rose about 300 per cent in each case, damaging global economy growth. The world is less reliant than it was on Middle Eastern hydrocarbons. But disruption to shipping in the strait would still push up prices steeply.

Oil traders currently regard this as a distant tail risk. They are more worried by flagging demand. After an initial spike in Brent crude prices to more than $90 a barrel at the outset of current hostilities, prices have dropped below $80 a barrel.

Iran, which supports Hamas, would have much to lose from the strait’s closure. Its oil exports to China are at record highs. Of the 15mn barrels per day of crude that passed through the strait in October, more than 1mn were Iranian.

Pipelines elsewhere would ease a blockade. A Saudi east-west pipeline to Yanbu in the Red Sea has extra capacity. Even so, some 2mn to 4mn bpd of the 6mn bpd of its crude flowing through the strait would stay stuck in Saudi Arabia, thinks consultancy Rystad Energy. Abu Dhabi also has pipeline capacity to circumvent the strait. But some 5.5mn bpd from Iraq, Kuwait and Qatar has no other exit route.

That leaves more than a tenth of global crude supply at risk from the strait’s closure. Markets are taking too sanguine a view of the threat. The likelihood of the conflict spreading increases the longer fighting continues.

Lex is the FT’s concise daily investment column. Expert writers in four global financial centres furnish informed, timely opinions on capital trends and big businesses. Click to explore

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