How should we view Iran's announcement on July 12 of closing the Strait of Hormuz again? Will such blockades become the new normal? And how should we respond in the long term?

Not only is American refining capacity unable to substitute for that of the Middle East, but U.S. shale oil also faces insurmountable geological and engineering disadvantages at the crude production stage. Many people mechanically apply manufacturing’s economies of scale to drilling—assuming that simply drilling more wells will inevitably drive down shale oil costs. This fundamentally violates hard geological and physical constraints. Shale oil is expensive not because producers deliberately raise prices, but due to its violent extraction methods and terrifying decline rates. Conventional Middle Eastern oil fields can produce via natural underground pressure through simple vertical wells; shale oil, however, is locked within ultra-tight rock formations and requires horizontal drilling and hydraulic fracturing—using high-pressure water and sand to explosively fracture the rock. Per-well costs are extremely high. Moreover, shale oil suffers a ‘treadmill effect’: output from a newly fractured well plummets by 60–70% in its first year. To maintain production, companies must continuously invest massive capital in new wells—forcing the breakeven price of shale oil ever higher. Even more critical is the irreplaceability of core geological resources—the so-called ‘sweet spot depletion law.’ Oil content and extraction difficulty vary drastically underground. Oil companies always drill first in the thickest, most productive, lowest-cost reservoirs—the ‘sweet spots.’ Once these optimal zones are fully exploited and depleted, firms are forced into marginal areas. There, equipment, labor, and fracturing fluid costs remain unchanged—but oil yield may drop by half. With fixed numerator (cost) and collapsing denominator (output), per-barrel cost does not fall; instead, it rises irreversibly as more wells are drilled. Finally, there are thermodynamic and materials-science ceilings on hydraulic fracturing—limits on horizontal well length and proppant (e.g., quartz sand) injection volume—that leave virtually no room for further technological cost reduction. If the entire industry ramps up drilling to boost output, fierce bidding wars immediately erupt across upstream supply chains—drilling rigs, skilled labor, and fracturing sand—triggering severe supply-chain bottlenecks. Attempts to achieve scale economies through more wells are instantly swallowed whole by surging input costs. If disruptions occur in the Middle East, capitalists would be forced to buy expensive, geologically constrained light shale oil from the Americas—or turn to ultra-heavy oil with prohibitively high processing costs—to fill the gap. That would directly destroy global refining profitability. Geological and physical laws always trump economic theories of scale. These non-absorbable physical extraction and logistics-refining costs ultimately manifest as expensive diesel and gasoline prices—translating directly into unavoidable global imported inflation. In short: For refiners, low-sulfur (‘sweet’) and heavy crudes are debuffs; for storage and transport operators, heavy and high-wax crudes are debuffs; and for explorers and producers, shale oil is the ultimate debuff. Let’s examine the buff/debuff profiles of major non-Gulf producing regions: Daqing conventional: medium API, [low-sulfur/sweet], [high-wax] Daqing shale: light API, [low-sulfur/sweet], [high-wax], [shale oil] Venezuela: high-sulfur/acidic, enormous reserves, [heavy] Texas shale: light API, [low-sulfur/sweet], [shale oil] Any claim that the Strait of Hormuz blockade has limited impact—or that its marginal effect is diminishing—is categorically rejected.

Middle Eastern oil has finally bypassed the Strait of Hormuz—how has Iran effectively undermined itself?

Thus, an awkward situation has emerged: Saudi Arabia and the UAE are steadily expanding their capacity to bypass the Strait of Hormuz—yet Iran’s own oil exports remain heavily dependent on this very waterway. This means that if Iran truly shuts the Strait of Hormuz completely, while Gulf neighbors would certainly suffer, Iran itself would also pay a steep price. More importantly, global buyers still have alternatives. China, India, Japan, and South Korea have long been key destinations for oil shipped through the Strait of Hormuz. According to EIA data, roughly 89% of crude oil and condensates transiting the Strait in the first half of 2025 were ultimately destined for Asian markets. If Saudi Arabia and the UAE can continue delivering oil via alternative routes, Asian buyers facing Iranian supply disruptions would not be left without substitutes. This exposes a fatal flaw in Iran’s most powerful card: it retains the ability to cause trouble—but increasingly struggles to ‘choke off everyone.’ Third, what’s truly weakened is not the Strait itself—but Iran’s ‘deterrence premium.’ So today, the central question about the Strait of Hormuz is no longer ‘Can Iran blockade it?’ Rather, it is: ‘Even if Iran does blockade it, can global oil markets still find ways to get oil out?’ The answer is gradually shifting toward ‘Yes—but at higher cost.’ That is the deepest structural change. The recent rapid recovery of Gulf oil exports illustrates this well. By late September, Saudi Arabia resumed crude loading at Yanbu Port, and after restarting its east-west pipeline, began exporting oil again via the Red Sea route. According to Reuters, pipeline throughput is still ramping up—but its full-capacity capacity stands at approximately 7 million barrels per day. In other words, infrastructure is sending Iran a clear market message: ‘You can raise transportation costs—but you can no longer cut off shipments entirely.’ What does this mean for Iran? It means the Strait of Hormuz’s strategic value hasn’t disappeared—but its ‘irreplaceability’ is declining. In the past, when Iran threatened to close the Strait, markets feared: ‘Global oil supply could be abruptly severed.’ Today, markets ask: ‘Will transport become more expensive? How long will detours take? How many alternative pipelines and ports remain available?’ These two questions command vastly different market pricing: the former triggers panic; the latter reflects cost. And that is the true meaning of Iran’s eroding ‘deterrence premium.’ Even more intriguingly, this shift may ironically be one Iran itself helped accelerate. For decades, Iran’s repeated emphasis on the Strait’s military significance has made Saudi Arabia, the UAE, and other energy exporters acutely aware of a single vulnerability: so long as their oil export lifeline remains under someone else’s control, they face perpetual risk of being strangled. Hence, pipelines, storage facilities, alternative ports, and new maritime shipping routes have proliferated. Today, these infrastructures appear costly—and even partly ‘idle.’ But during crises, they become indispensable insurance. And the defining feature of insurance is this: it seems useless in normal times—but suddenly becomes extraordinarily valuable when disaster strikes. So Iran’s real strategic dilemma isn’t that the Strait of Hormuz has lost value—but that it is transforming from ‘a master key capable of controlling everyone’ into ‘a key that can only affect some.’

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