Transportation of petroleum is characterized as one of the most strategically flow of resources in the global economy. International seaborne trade for 2014 accounted to 9,548 million out of which the 2,844 million (29.8%) tons loaded represents the Tanker trade (crude oil, petroleum product and gas).
Oil is a vital source of energy and will likely remain so for many decades to come. Despite the recent development and the growth of alternative energy sources (Sun-Wind-Solar), oil will continue to be the dominant commodity for energy in the following years.
Most countries are significantly affected by developments in the oil market, either as producers, consumers, or both. Crude oil, petroleum products and gas are strictly correlated with the development and wealth of the international and domestic economy.
There are essential distributions constraints though as 2/3 of the world’s petroleum production is shipped by sea and it requires seaborne navigation through straits and passages (i.e. Suez Canal- Strait of Hormuz -Straits of Malacca). Possible disruptions in any petroleum trade through these straits and passage can lead to direct and indirect consequences to the international and domestic economies.
Development of international Maritime choke points is an action to tackle possible disruptions and securing safe seaborne transportation of petroleum commodities, from the point of origin to consumers’ market. World chokepoints for maritime transit of oil can be said that are critical parts of the global energy security.
The concept of a choke point derives from the military context, relating to terrain. It implies a narrow passageway that cannot easily be bypassed and that offers a ready opportunity to prevent the movement of military forces.
Europe, Japan, Russia and the United States have traditionally been most dependent on oil imports vulnerable to disruption. This may change over time as the United States becomes less dependent on imports from outside the western hemisphere, and East Asia much more so. China, which only became a net oil importer in 1993, is already more dependent than the United States on oil supplies from the Middle East.
There is no doubt that disruptions to key energy choke points, whether maritime or onshore, could have serious consequences on the volatility of energy prices. Furthermore, major disruptions to particular choke points could, under some circumstances, lead to physical supply shortages of oil and gas.
When applied to energy trade, the concept rapidly becomes more complicated. There are relatively well-documented maritime choke points for the transport of oil, the most important of which is the Strait of Hormuz and the Straits of Malacca and Singapore. Other choke points in the global oil and gas system could also constrain the supply of products to the consumer market, provoking wider market instability.
The international trade for both oil and gas, has increased significantly in recent years. Overall, one-third of the world’s total crude oil exports in 2014 passed through the Strait of Hormuz.
Two markets effectively determine the price of oil. The ‘wet barrel’ markets, markets where real barrels of oil are bought and sold on the spot or on term contract basis. The ‘paper barrel’ markets, where promises to deliver or take delivery of paper barrels of oil are exchanged. The key determinants of oil prices overall are the interactions of perceptions within and across these two markets.
The wet barrel market looks to prices in the paper barrel market for guidance on what prices might be. The paper barrel market looks to the wet barrel market to see if there is an expected shortage or surplus, and reacts accordingly. Problems with maritime choke points, real or expected, have an impact on both markets. A loss of physical supply would affect the wet barrel market by creating shortages. The effect in terms of price and price volatility would depend on how much and what type of crude oil has been lost from supply, and how much spare capacity and/or what stocks exist elsewhere to replace the loss, and the time-frame (ton/mile) needed to do so.
However, at the same time, a crisis situation around a choke point will influence perceptions and expectations in paper barrel markets. This could in itself change oil prices dramatically. The uncertain role and impact of perceptions make it very difficult to predict the precise price impact of political instability or disruption of maritime choke points. But that very uncertainty can increase the likelihood of price volatility as a result of feedback within paper markets.
Historically, episodes of instability around maritime choke points have indeed led to supply disruptions. Strategically and economically one of the most important waterways in the world is the Suez Canal which is located in Egypt, and connects Port Said on the Mediterranean Sea with the port of Suez on the Red Sea. The Suez Canal provides an essentially direct route for transport of goods between Asia and Europe.
The Suez Canal carries about 2.5 percent of world oil output. Possible closure of the Suez Canal would divert oil tankers around the southern tip of Africa, the Cape of Good Hope, adding approximately 6,000 miles to transit, increasing both costs and shipping time.
From 1967 until 1975, Egypt government kept the canal closed in response to Israel’s seizure of Arab territory (Six Day War), forcing tankers to travel around the Cape of Good Hope. This decision, lead to physical supply shortages of oil (short-term) and price had increased to 55 dollars per barrel from a stable price of 15-20 dollars during the years 1930-1967.
International energy markets depend on reliable transport routes. Blocking a chokepoint, even temporarily, can lead to substantial increases in total energy costs and world energy prices. Chokepoints also leave oil tankers vulnerable to theft from pirates, terrorist attacks, shipping accidents that can lead to disastrous oil spills, and political unrest in the form of wars or hostilities.
The Panama Canal, the Suez Canal, the Strait of Malacca and the Strait of Hormuz account for the world’s four most important strategic maritime passages. Disruptions could affect oil prices and add thousands of miles of transit in alternative routes. By volume of oil transit, the Strait of Hormuz, leading out of the Persian Gulf, and the Strait of Malacca, linking the Indian and Pacific Oceans, are the world’s most important strategic chokepoints.
Chokepoints are a very critical part of global energy security mainly because of the high volume of petroleum and other liquids transported through their narrow passages, and for this reason are closely monitored by international organizations and developed countries to avoid possible disruptions.