Every day that the Strait of Hormuz remains closed brings the world economy closer to a crisis. While the closure has acutely affected oil and gas supplies and prices, it could soon send convulsions through supply chains for other commodities, such as plastics and fertilizers, that are foundational to the global economy and food supplies. This cascade of effects could strengthen China and Russia’s geopolitical influence over impacted supply chains, while hurting consumers around the world, including in the United States. If the Strait of Hormuz closure persists for even a few more months, it could become the single-largest and most consequential energy and supply chain disruption in modern history, all but ensuring a global period of stagflation.
The geopolitical fallout: China and Russia could gain leverage in petrochemicals and fertilizers
Amid outages in the petrochemical complex across ex-China Asia and the Middle East, the crisis could enable Beijing to establish new chokepoints over the near-term or more enduringly. Similarly, Beijing’s close partners in Moscow and Minsk will become more powerful across food supply chains.
Petrochemicals, the feedstock for plastics and other products
The direct and second-order consequences of a Strait of Hormuz closure could reverberate through petrochemical markets with major economic and geopolitical implications. In the upstream segment, the Middle East normally supplies about 30 percent of global seaborne exports of liquefied petroleum gas, which can be used for petrochemicals feedstock. Drewry analyst Anshika Prajapati estimates that prolonged closure of the Strait would reduce 24 percent of global seaborne naphtha, another key petrochemical input. These exports are now largely cut off from global markets.
In addition to the upstream outage, downstream facilities in East Asia could face closure due to insufficient electricity, while Middle East petrochemical export facilities are facing massive disruptions. South Korea, Taiwan, and Japan hold significant petrochemical export capacity. But petrochemical plants are highly electricity-intensive, and powering the electricity grids of these East Asian democracies relies heavily on a now severely constricted liquefied natural gas (LNG) market. Accordingly, if Middle East LNG production outages force these countries to ration electricity, they could choose to curtail certain petrochemical products in favor of higher priority use cases for LNG, such as air conditioning or the manufacturing of semiconductors or high bandwidth memory for artificial intelligence (AI) supply chains.
Conversely, while the oil and gas shortage could harm already-suffering South Korean, Taiwanese, and Japanese petrochemicals industries, it could help Chinese companies consolidate parts of the supply chain. While the profitability of Chinese petrochemical firms could take a short-term hit, they have access to abundant electricity—and China’s partner, Russia, is a major supplier of its petrochemicals feedstock, including naphtha, an ingredient that Asian petrochemical companies are scrambling to obtain. In the wake of the crisis, South Korean petrochemical producers are cutting run rates by up to 50 percent; impacts in Japan are also severe, as about 42 percent of its naphtha supply comes from the Middle East. Thus, the Middle East crisis and its ripple effects could ultimately see the petrochemical sector concentrate in China, giving Beijing yet another leverage point over global supply chains. For example, China, which shifted from a net importer of global polyvinyl chloride (PVC) to a net exporter, now accounts for 78 percent of global incremental PVC capacity additions. Chinese PVC producers largely use a coal-based process that requires no imported oil or naphtha, while top producers in Japan, Taiwan, and South Korea are already cutting output over fears of losing feedstock and electricity. Therefore, while Chinese petrochemical producers will be hit by the crisis, they could yet emerge on top.
The United States, whose shale-based petrochemical producers are insulated from the Hormuz disruption, will likely gain market share if prices spike. Nevertheless, certain nodes of the global petrochemical supply chain could be concentrated in China if the crisis persists, and as the allied industrial base is degraded.
If global petrochemical constraints persist due to upstream supply issues and petrochemical closures, consumer prices will rise, or even soar. US consumers will be disproportionately impacted, as the average US resident used 255 kilograms of new plastics in 2019, versus a world average of 60.1 kilograms.
Fertilizers and food prices
Not only has the Strait of Hormuz closure interrupted global energy trade, but it has also suspended the movement of fertilizer representing roughly 30 percent of globally traded ammonia-based nitrogen fertilizer that is vital before planting season. While the United States is one of the largest fertilizer producers, it relies on ammonia imports to lower costs and meet demand; it has previously relied on imports for roughly half of domestic urea use. Although US ammonia imports do not primarily route through the Strait of Hormuz, the closure constricts global supply, driving up prices that US markets cannot escape. Fertilizer supplies are already significantly lower than normal, and prices are surging. The cost of urea at the import hub in New Orleans rose 32 percent in just one week, from $516 to $683 per metric ton.
The United States will feel the economic impact of rising input costs on multiple fronts. When the cost of producing crops increases, farmers and food processors will pass those expenses through the supply chain, directly increasing the final price consumers pay for goods. Farmers may also be less incentivized to grow nitrogen-intensive crops, such as corn. This could also have cost implications for livestock feed, and thus meat and dairy products for consumers.
Disrupted fertilizer supply chains hold important geopolitical consequences. China, the second largest fertilizer exporter, is shielding its farmers and consumers from price shocks by constricting sales abroad, for now. As China withholds fertilizer exports, countries that previously sourced from Chinese and Middle Eastern suppliers will scramble for alternatives, further tightening global markets.
In the near term, Russia and Belarus are well-positioned to fill any gap left behind. Russia remains the world’s largest exporter of fertilizer, and Belarus is a major agricultural player in potash, a nutrient used for fertilizer. If Russia and Belarus face no export constraints, they are well-placed to exercise greater influence across global fertilizer markets.
China largely uses domestically-sourced coal as feedstock for ammonia and fertilizer production, so its output will not be directly constrained by a Strait of Hormuz closure. Over the medium term, Beijing may selectively step back into export markets if the geopolitical and commercial benefits outweigh domestic food security risks.
If global supply chain outages persist, Beijing, Moscow, and Minsk may cooperate more closely on global fertilizer distribution.
The economic fallout: A long-duration Strait of Hormuz closure will bring waves of economic pain
This analysis is not comprehensive: as during COVID, many acute supply chain vulnerabilities will only reveal themselves with time. However, this analysis on key commodities does reveal that outages in the Strait of Hormuz will quickly translate into waves of economic pain.
The first two waves will crest in the form of higher refined product prices. This is already happening: jet fuel has low storage inventories and is therefore sensitive to supply outages. Accordingly, jet fuel and air ticket prices are soaring, especially in Asia. The rest of the world will quickly follow. Other refined products, such as diesel and gasoline, will be in the next wave.
The third wave of price increases will ripple throughout the US and global economy in the form of higher agricultural prices. As ammonia, fertilizer, and diesel input prices rise, farmers will plant less and crop yields will fall, sending consumer food prices higher. If Beijing, in partnership with Moscow and Minsk, selectively restricts agricultural-related exports, then US and global inflation will run higher.
The next inflation wave may be less visible, but more insidious. Food packaging, medical supplies, clothing, and virtually every manufactured good rely on petrochemicals in some way. Accordingly, petrochemical outages in the Asian democracies would trigger broad-based price increases in the United States. If China imposes export controls on certain petrochemical products (just as it does for critical minerals), US inflation will likely run higher.
Finally, the combination of these waves, along with other latent vulnerabilities, may trigger broad-based, sustained price increases. In turn, the commodity price spike may shape longer-term inflation expectations for consumers. If the Federal Reserve loses its hard-won credibility on containing prices, consumer inflation expectations will rise. All else being equal, this would lift inflation and real interest rates.
Every day the Strait is closed brings higher prices and new risks for the United States and its allies. As allied industrial capacity tightens, especially in petrochemicals and fertilizers, China and Russia will increasingly be able to secure new geopolitical leverage across global supply chains. Every day the war continues gives them more cards to play.
Joseph Webster is a senior fellow at the Atlantic Council’s Global Energy Center and the Indo-Pacific Security Initiative; he also edits the independent China-Russia Report.
Kate Burnett is a young global professional at the Global Energy Center.
This analysis reflects their own personal opinions.
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Image: (Roger Starnes Sr., Unsplash, https://unsplash.com/photos/a-farm-with-silos-and-silos-in-the-foreground-WqVtgK11CdA)