With the Strait of Hormuz open, will the economy improve?

The provisional agreement to end the war in Iran and reopen the Strait of Hormuz would be good news for the global economy. However, while oil prices fell on Monday, many doubts remained about when and how oil would start flowing again through the world's most vital energy transport artery. Before the war, one-fifth of the world's crude oil passed through the strait. Now, it will take time for the hundreds of ships trapped in the Persian Gulf to navigate through the narrow passage. Additionally, Gulf oil producers who reduced their output will need time to reactivate crude flow. Analysts also point out that ship captains may take their time deciding whether the passage is safe and if the threat of an attack from Iran has truly diminished. In summary, oil prices, inflation, and energy flows will not return immediately to pre-war levels; it will take weeks or even months. This assumes that the agreement, which is set to be signed on Friday, proves to be durable. Details have yet to be disclosed. Even with the strait fully open, it will take time for tankers to enter, load, and make the journey to Asian countries, the main customers for Gulf oil from Saudi Arabia, Iraq, Bahrain, the United Arab Emirates, Kuwait, and Oman. A round trip to Japan can take between 45 and 50 days. Given the volatility of the situation, captains, insurers, and owners may take their time before attempting to cross. Richard Meade, editor-in-chief of Lloyd’s List, a maritime analysis and data company, noted that many warn that mine clearance and the return to using internationally recognized transit routes 'are prerequisites for safe navigation.' Ships have been trickling out through an inspection corridor managed by Iran in the northern part of the strait, while others have managed to leave with lights and tracking systems off, under the guidance of U.S. forces, through a southern passage along the coast of Oman. Iran had threatened to attack vessels using the internationally established transit routes in the center of the strait, designed to prevent collisions between incoming and outgoing vessels. Approximately 500 commercial ships remain in the Persian Gulf, according to maritime and energy intelligence firm Kpler, and not all can exit simultaneously through the narrow strait. Amena Bakr, head of energy and OPEC+ analysis for the Middle East at Kpler, estimated that mine clearance would take six months; the departure and return of ships for reloading, two to three months; and restoring production to pre-conflict levels in some countries, another three months. Iran has demanded the right to charge fees to ships using the strait, and in some cases, has already imposed payments to allow vessels to exit. Trump stated on his social media platform, Truth Social, that the agreement involved a 'toll-free opening,' but there has been no confirmation from Iran. The period between the announcement of the agreement and its signing 'allows both parties to issue contradictory statements about the pact, especially regarding the extent to which Iran will manage traffic and demand payment of fees,' noted Torbjorn Soltvedt, senior Middle East analyst at risk intelligence firm Verisk Maplecroft. The payment of fees would pose a dilemma for shipowners, given that the U.S. and EU have designated the Islamic Revolutionary Guard Corps as a terrorist organization, and the U.S. Treasury Department has sanctioned the entity Iran announced to manage the collections. Unless these sanctions are modified, making payments exposes shipping companies and banks to being sanctioned. Legal experts argue that allowing Iran to control the passage would violate international law on freedom of navigation, as established in the United Nations Convention on the Law of the Sea, which obligates countries to allow innocent (or peaceful) passage through their territorial waters. The waters of the strait are shared by Iran to the north and Oman to the south. Some Middle Eastern producers suspended oil extraction—a process known as well closure—when they ran out of storage space. Restarting those operations can be a slow process. Countries like Saudi Arabia and the United Arab Emirates, which were able to export some of their oil through pipelines or alternative routes other than the Strait of Hormuz, could be among the first to resume production, noted Alan Gelder, senior vice president of refining, chemicals, and oil markets at Wood Mackenzie, an analysis firm. 'Places like Iraq could face greater difficulties, as they have suffered a much broader disruption of production and their fields are more complex... it could take nearly a year before they recover,' he stated. Claudio Galimberti, chief economist at Rystad Energy, noted in an emailed comment that 'sentiment has clearly improved. But sentiment is not the same as supply.' 'It will take time for production to increase again, for logistics to normalize, and for the risk premium embedded in crude prices to dissipate,' he said. Countries will not resume their activities until they are certain that the strait will remain open durably and that the ceasefire will last beyond 30 or 60 days, stated Daniel Sternoff, senior researcher at the Center on Global Energy Policy at Columbia University. Economists at Capital Economics estimate that energy flows will reach 80% of pre-war levels by September. Inflation will not drop immediately. Even if the agreement allows for the instant reopening of the strait, this will not lead to an immediate drop in inflation, according to economists. Inflation 'will remain above target in most major economies throughout this year and into the first half of next year, even as growth remains relatively weak,' said Neil Shearing, chief economist at Capital Economics. Inflation could even rise when government measures aimed at cushioning the energy impact expire, warned Joachim Nagel, president of the Bundesbank (Germany's central bank), during a speech on Monday. Among these measures is the temporary reduction of fuel taxes in Germany—by 17 cents per liter—effective until June 30. 'It will take months before oil supply returns to normal,' Nagel stated.