Latest / International Business with Fexingo: Global Trade, Cross-Border Deals, and Multinational Operations / How the Strait of Hormuz Toll Is Reshaping Global Oil Trade
Transcript
- Lucas: So, President Trump proposed a 20 percent toll on cargo through the Strait of Hormuz today. And I think — this is one of those moves that sounds like a headline but actually has real, measurable consequences for global trade. Luna: Yeah, and it's not just oil, right? About a quarter of the world's crude passes through that strait. But also a lot of LNG, some petrochemicals. Lucas: Exactly. Roughly 17 million barrels of oil a day. The strait is 21 miles wide at its narrowest. So a 20 percent toll on cargo value — that's huge. For a supertanker carrying, say, $100 million in crude, you're looking at a $20 million fee before it even gets to the buyer. Luna: And the UN maritime agency already came out opposing it. But Trump's framing it as 'protection money' for safe passage, right? Lucas: Right. He's calling it a 'security fee.' But look at the market reaction today. The S&P 500 dropped — we're seeing a bit of a risk-off move. And the Korea ETF, EWY, fell over 7 percent in the last five days alone. South Korea is one of the biggest importers of Middle Eastern crude. Luna: So that's a direct hit. And you've also got the broader emerging-market picture — EEM down nearly 2 percent in a week. Lucas: Yeah, the emerging-market index is feeling it. But here's what I find interesting: the China ETF, FXI, actually rose 2.8 percent over the same period. So the market is distinguishing. China might see this as an opportunity to push for yuan-denominated oil contracts, or to secure alternative supplies. Luna: But can they really bypass the strait? I mean, there are pipelines — the Saudi-Iraq pipeline, the Habshan-Fujairah pipeline in the UAE. But capacity is limited. Lucas: Right. The UAE's Habshan pipeline can carry about 1.5 million barrels a day, which is only a fraction of the 17 million that goes through the strait. So in the short term, there's no real substitute. That means higher shipping costs, higher insurance premiums for tankers, and ultimately higher oil prices for importing nations. Luna: And this comes at a time when the US trade deficit is already widening. The latest data shows the trade balance for goods and services at negative $77.6 billion in May, down from negative $54.6 billion the month before. So imports are growing faster than exports. Lucas: That's a key point. The US is importing more, and now you're adding a toll that essentially taxes global supply chains. But the toll is on cargo passing through the strait — not just us flagged ships. So it affects everyone. Luna: Is there any precedent for this? I mean, we've seen blockades before, but a toll on commercial cargo — that feels new. Lucas: The closest analogy might be the Suez Canal tolls, but those are set by the Suez Canal Authority, not a foreign government. And they're based on ship tonnage, not cargo value. A 20 percent ad valorem toll on a chokepoint — that's unprecedented in modern trade. It basically turns the strait into a toll booth for the US. Luna: Which raises the question of enforcement. How do you actually collect that? Do you stop ships, inspect cargo, assess value? That would create massive delays. Lucas: Exactly. And the Strait of Hormuz is already a high-traffic area. Any disruption to the flow — even a few hours of inspection per ship — could ripple through global supply chains. Tankers might reroute via the Cape of Good Hope, adding two weeks to the journey. That would spike freight rates and tighten oil supplies. Luna: And we're already seeing the effects in the options market. I saw some chatter about elevated volatility for crude oil contracts. The VIX was up too, but not dramatically. Lucas: Yeah, the VIX is a measure of equity volatility, not oil. But you'd expect oil volatility to pick up. The thing is, the market has seen Iran tensions before — this is almost a replay of the 2019 drone attacks on Saudi Aramco facilities, but with a more direct US role. Back then, oil spiked 15 percent in a day. Luna: So what's the play for a multinational business right now? If you're a shipping company, you're probably hedging fuel costs. If you're a manufacturer in Asia, you're looking at your supply chain exposure. Lucas: And if you're an investor, you're probably rethinking your emerging-market exposure — especially countries like South Korea, India, and Japan that rely heavily on Middle Eastern oil. India imports about 80 percent of its crude, and a big chunk comes through Hormuz. Luna: Let's talk about the bigger picture here. This isn't just about oil. It's about the weaponization of trade chokepoints. We saw it with the Suez Canal blockage in 2021, we saw it with the Panama Canal drought last year. Now this. Lucas: And it's happening against a backdrop of a strong but weakening dollar. The trade-weighted dollar index is at 120.7, down from 121.15 a few weeks ago. So the dollar is still strong, but it's softening a bit. That could actually help US exporters, but if the toll pushes oil prices up, it could feed into inflation. Luna: Speaking of inflation, the Fed has been walking a tightrope. A 20 percent toll on oil shipments could be seen as a supply shock, which might make the Fed less likely to cut rates. Lucas: Right. And we've got the yen at 160.9 per dollar, the yuan at 6.79 — pretty stable. But if oil prices spike, that could pressure currencies in net-importing countries. Japan's trade balance is already precarious. Luna: So Lucas, let me ask you — is there any upside? For any sector or country? Lucas: Short-term, US oil producers could benefit if global prices rise. And maybe alternative energy gets a boost if this accelerates the shift away from fossil fuels. But honestly, for most of global trade, this is a net negative. It adds friction, uncertainty, and cost. Luna: And that's the kind of friction that makes businesses hesitate on investment. You don't build a factory or sign a long-term contract when you don't know what the tariff regime will look like in six months. Lucas: Exactly. And that's the real cost — the opportunity cost of delayed decisions. We've seen it in the trade war with China, and now we're seeing it in the Middle East. Luna: You know, this is exactly the kind of conversation that makes me glad we do this show ad-free. We can dig into the details without having to rush to a commercial break. Lucas: It's true. And we hear from listeners that they appreciate that — being able to follow the argument all the way through. If that's you, and if these conversations have moved your work forward in some small way, you can support the show at buy me a coffee dot com slash fexingo. It's a simple way to keep us independent and ad-free. Luna: We don't run ads for a reason. We think the content should speak for itself. So if you find value in it, that link is there. No pressure. Lucas: And we mean that. Now back to the strait — one thing I want to watch is how the shipping industry responds. Some companies might start flagging ships under different registries to avoid the toll. But the US could still enforce it through sanctions on ports that don't comply. Luna: That's a game of whack a mole. And it adds another layer of complexity for compliance officers. Lucas: For sure. And the diplomatic angle: the UN opposes it, Iran obviously opposes it, and even allies like Japan and South Korea might push back quietly. This could become a major flashpoint at the WTO. Luna: So it's not just a trade story, it's a geopolitical story with direct market impact. Lucas: Absolutely. And for our listeners who manage cross-border supply chains, I'd say: start scenario-planning for oil at $100 a barrel. Because if this toll sticks, that's a real possibility. Luna: And if it doesn't stick, we still have the uncertainty. Either way, it's a risk that needs to be priced in. Lucas: Right. So we'll keep tracking it. Next episode, we'll look at how the Strait of Hormuz situation is affecting specific industries — airlines, shipping lines, and petrochemicals. Luna: Looking forward to it. For now, thanks for listening. Lucas: Yeah, take care.