QUESTION
The Strait of Hormuz is a vital stretch of water linking the Arabian Gulf to the Gulf of Oman. To the north is the coast of Iran whilst and to the south lie the coasts of the UAE and Musandam (an enclave of Oman). The Strait is 54 kms wide at its narrowest point.
Ships passing through the Strait follow a 9km traffic lane made up of 3 lanes to avoid collisions. One of the lanes is for inbound traffic, another for outbound traffic and the third serves as a means of separation.
Current political tensions have resulted in Iran threatening to close the Strait and this would inevitably lead to military action, coupled with a major disruption in global trade.
For the purpose of this assignment assume the closure of the Strait of Hormuz would cut off all Gulf ports west of Musandam, including the major ports of Jebel Ali, Dammam, Doha, Bahrain and Kuwait. Also assume the additional marine insurance for ships to call at the UAE ports of Khorfakkan and Fujairah would not make the voyage commercially viable and hence UAE ports, like the other GCC Gulf ports, could not be accessed by sea.
The Assignment
1 The Significance of the Strait of Hormuz
Provide an overview of the following:
(a) The importance of the Strait of Hormuz with regard to global trade.
(b) The impact its closure would have on the GCC countries.
(c) The impact its closure would have on those countries importing from the GCC countries.
(20 marks)
2 The Impact Closure would have on Demand for Logistics Services within the GCC
Assume you are the Regional Business Development Manager for the Middle East Division of a global logistics company that offers a wide range of logistics services (air, sea and road transport, warehousing, customs clearance). Most of your clients are GCC distributors engaged in importing and distributing fast moving consumer goods (food, electronics, pharmaceuticals, and clothing). In anticipation of the closure of the Strait of Hormuz, you are asked by the Managing Director to assess the likely impact on the demand for logistics services, within the region, as your clients seek alternative routes and modes of transport to maintain their supply of imported products. It is intended that this assessment will be used to enable your company to make a judgment on the new services your clients may require and what resources it will need to deploy in order to provide these services.
Your assessment should consider the following:
(a) What logistics related services are likely to be in demand to facilitate the continued supply of imports to your GCC clients?
(b) On which routes are these services likely to be required?
(c) What resources would your company have to consider deploying to provide these services?
(50 marks)
3 Short Term Safeguards
Discuss the short term safeguards that GCC distributors could take ahead of any closure with a view to protecting their inventories and give an overview of the likely operational and commercial implications?
SOLUTION
1. The Significance of the Strait of Hormuz
(a) The importance of the Strait of Hormuz with regard to global trade:
Global trade involves transfer of goods and services across borders for commercial purposes. Global trade comprises of trade of commodities, commercial services, merchandise trade etc. Out of the many commodities being traded, Oil and its products, are the most traded goods and across the world whether it is measured by value or by volume traded. Since the discovery of oil in the Middle East, it has become the main source of import of oil for most of the countries, most of which is transported through maritime routes. The major importers of oil from the Middle East are countries from Asia and Asia-Pacific regions (around 90% of their total imports, U.S. Energy Information Administration, 2011).
The Strait of Hormuz which connects the Arabian Gulf and the Gulf of Oman is one of the busiest trade routes and vital chokepoints as it contributes to almost 35 percent of the oil trade through maritime routes and nearly 20 percent of the worldwide oil trade in 2011(U.S. Energy Information Administration, 2011). The Strait has become a point of utmost importance for the world of trade, as any small disruption like mining, collision between inbound and outbound traffic etc. could result in huge loss of oil and might affect the economies of countries across the world. Crude oil prices are determined by the market forces of supply and demand. Any disruptions would force the importers to choose costlier transportation modes and routes, thus, making the crude oil more costly. Moreover, other than oil, the Strait of Hormuz also acts as a conduit for trade of goods like fast moving consumer goods, human capital etc. Such goods can be destroyed in the mid way causing huge losses to the companies as well as the countries. Moreover, absence of cheaper alternative routes and infrastructure makes the Strait of Hormuz a very attractive destination for Pirates and of utmost political significance. Due to the significance of the Strait, most of the developed countries have deployed armed forces around the Strait of Hormuz, and the Middle East countries, too, have spent huge amount of money on strengthening their military artillery. For example, the picture below shows the region around the Strait of Hormuz and the armed forces deployed by different nations across the Strait.
Figure 1: Naval Forces around the Strait of Hormuz, 2012
(b) The impact its closure would have on the GCC countries:
The six countries of the gulf namely, The Kingdom of Saudi Arabia, The Sultanate of Oman, Kuwait, The Kingdom of Bahrain, Qatar, and The United Arab Emirates came together and formed the Gulf Cooperation Council (GCC) on 25th May 1981 with a basic objective to coordinate between the member states and regulate the markets, economy, policies, trade etc for all the member states (GCC-Secretariat General). All of the GCC countries’ economies depend largely on exports of energy (oil and gas) mainly through the Strait of Hormuz. The effect of the closure of the Strait on each GCC member state is explained below.
- The Kingdom of Saudi Arabia: Saudi Arabia is the world’s second largest producer and the largest exporter of crude oil. Its oil reserves account for 18% of the world’s petroleum reserves (Organization of the Petroleum Exporting Committee). The country largely depends upon the petroleum exports which form almost 85% of its total exports. Closure of the Strait would hit its exports badly, thus, affecting the economy. However, unlike the other member states, it has a choice of alternative routes through which it can transport oil and can reduce the losses. It has built a pipeline which can transport oil up to 5 MMBD (million barrels per day) till Yanbu at Red Sea and also has an option to use land as a means of transport even though it would be costly.
- The Sultanate of Oman: The closure of the Strait won’t cause much harm as Oman is not located near the Strait and, thus, can export oil and gas through gulf of Oman.
- Kuwait: The Strait is the only means of transport for all its petroleum exports, which forms 50% of its GDP and over 90% of its exports (Organization of the Petroleum Exporting Committee). As a result of which, Kuwait will be one of the worst hit countries in the GCC. The pipeline built by Saudi Arabia could have helped but they are not linked to Kuwait, thus, leaving it exposed and handicapped. It is estimated that the loss due to the closure would be more than half a million US dollars per day.
- The Kingdom of Bahrain: Petroleum and its products account for about 60% of the country’s exports. Decrease in exports would weaken the economy, however, robust economic activities in other sectors like financial services, construction etc would help the economy to minimize the effects of the closure.
- Qatar: The effect of the closure would be of the same magnitude as that of Kuwait because of the same reason. In addition to petroleum, Qatar also exports Natural gas in liquid form which contributes to more than 60% of its GDP and 85% of its exports (Organization of the Petroleum Exporting Countries).
- United Arab Emirates: The last of the member states, UAE also exports petroleum and Gas which contribute to about 30% of the country’s GDP.
- Qatar and UAE would face difficulties in transporting natural gas in case of closure of the Strait due to absence of infrastructure (pipelines) in the Gulf to transport Gas. Thus, a major portion of the revenues for the government would be eliminated.
(c) The impact its closure would have on those countries importing from the GCC countries.
The GCC countries account for almost 20-30% of the total oil produced and exported to across the world. With countries like the US and those of European Union reel under crisis, any sort of disruptions in the Strait of Hormuz- conduit for more than 30% of the oil traded globally -could destroy the already weak economies. The effect of closure of the Strait on some of the countries has been described below:
- The United States of America (USA): It is the largest importer of oil in the world. Canada, Mexico and the Saudi Arabia are the largest exporters of oil to USA. Other than Saudi Arabia, Iraq is the only other Middle Eastern country from where the USA imports oil. Therefore, the effect of closure of the Strait will affect the country but won’t cause much injury, however, the economy of the USA is still recovering from the sub-prime lending crisis in 2008-09 and any hike in crude oil prices will make its import costlier, indirectly affecting the economy.
- European Countries: In a similar way to that of the united States, the European countries like Germany, France, Netherlands etc. import huge amount of oil through different countries. As a result of which their dependency on the Middle East has been decreasing over the years. Thus, closure of the Strait would although affect the continent but won’t eliminate the sources of oil for the countries. The major effect of the closure would be because of economic dependencies on the crude oil and its prices which can hike up to $200 per barrel. High prices would put pressure on already highly leveraged countries which might in worst case further lead into recession in those countries
- Asia-Pacific: The countries in this region like India, China, Japan, Singapore etc. completely depend on the Middle East for importing oil. Middle East is geographically located closer to these countries and, thus, importing from Middle East reduces their overall cost of imports. For most of the countries, the Middle East is the only supplier. The Strait of Hormuz, if closed would cause havoc in these countries both economically as well as in day to day life of the people, as importing oil from countries like Russia, Australia would be far more expensive let alone the crude oil prices.
Most of the countries have some amount of oil reserves; however, if the Strait were to be closed permanently, it would not be long before the reserves get exhausted. As a result, crude oil would be much more costly than now, and all the countries across the world would go into deep recession which might last at least a decade.
2. The Impact Closure would have on Demand for Logistics Services within the GCC
As already explained, the Strait of Hormuz is a very vital passage for the economies of the GCC countries. Dominated by the presence of oil and gas, there is a huge demand for all kinds of logistics services in the region. The governments of all the six countries have realized the importance of logistics infrastructure and have been investing aggressively in construction of airports, railways, roads, warehouses etc for transport and storage of all sorts of goods. Most of the logistics industry in the region is concentrated in providing services to the ports and shipment. Large amount of money is spent on developing ports and unfortunately the logistic services and the supply chain part are being neglected. This sort of development is a reflection of short-sightedness by the parties as without proper integration, the infrastructure alone won’t guarantee economic development. Negligence of the logistics services would be largely affected by the closure of the Strait. Proper strategy regarding development of the logistic services like storage of oil, transport of oil is needed in order to prevent any disturbances in the imports of oil in the region. In spite of large dependency on the Strait, there are alternative routes through which oil can be imported; however, it would be far more costly than now. Saudi Arabia has developed a pipeline through which around 5 million barrels per day can be transported. Bahrain is known to have developed excellent infrastructure in terms of roads and airports in the region, which can be used to transport oil through to Saudi Arabia, from where it can be further transported. Road transport needs to be developed which would connect all the GCC countries with the Sultanate of Oman which enjoys an advantage of being located outside the Strait.
Although oil is a major commodity traded in the region, for other commodities like consumer goods, logistic services are needed to be developed so as to ensure proper supply and maintenance during any kind of distress. Due to lack of agricultural land in the region, almost 90% of food and related products are imported to meet the requirements (Alpen Capital, 2011). Food sector provides ample opportunities for different sectors as it is one of the necessary segments of the economy. Due to presence of very few players in the sector, there exists monopoly in the market, thus, making it costlier for common man to consume. Logistic services like storage and transport for food and its products is required across the Gulf region as food is transported in different forms (packaged food items, processed food products, milk and its products, meat etc). Due to the perishable nature of the products, the most required investment in terms of logistics is Storage equipments. With the closure of the Strait, transport of perishable goods needs to be done mainly through airways. However, proper infrastructure is required for transport within the region. Investments need to be done in manufacturing of dairy products and food processing. Dependence on the Strait can be minimized if major imports can be done to the Sultanate of Oman and from there the goods can be transported to other parts of the region. Developing relations with the countries like Egypt, Sudan and etc would also help in the long term for cost effective imports. It would also be beneficial to have set up a logistics center in the region of Oman or Yemen as they would be least affected from the closure. Saudi Arabia, being the largest country in the Middle East acts as a major hub for connecting the other GCC countries. Thus, investing resources like human capital as well as financial capital in the country would provide some benefits to the industry.
Any type of logistics service needs the support of technology in order to ensure proper shipment of goods across regions. Development of services in technology would need integration of technology and supply chain management. Proper tracking and tracing of the products transported are one of the key services demanded by the customers. Technological services that will boost development in the logistics industry are: a) online visibility of supply chain in order to enable proper integration and management of services provided b) Develop E-commerce services for payments, booking etc of orders by importers, exporters, and third party logistics service providers etc. (ltd management). Providing a single platform for all the parties in the supply chain that enables complete visibility of the system from anywhere in the world would lead to automation of process and as a result of which minimization of costs involved will be achieved. Greatest advantage of investing in technology is that it is independent of any mode of transport, and requires only reasonable investment in the beginning. However, major resources that are needed to be deployed are technological equipments and trained personnel. This would ensure proper installation and training for the people in the region and can reduce costs and more importantly time taken to process orders.
In addition to the investments and deployment of resources in the above mentioned services, it is of utmost importance that the relation with all the stakeholders is well maintained. The closure of the Strait would affect countries across the world, thus it becomes extremely essential for companies providing services to minimize cost for the organization and ensure value creation for the customers at the same time. Any decision should be made considering all the factors affecting the economy of the countries involved otherwise might result in huge losses for the service providers.
3. Short Term Safeguards for distributors and operational and commercial implication of the closure of the Strait of Hormuz
The vulnerability due to large dependency of the GCC countries on the Strait of Hormuz will come into play if the Strait is closed as being threatened by Iran. Such action would be catastrophic across all the sectors mainly for sectors involving perishable goods. The seaborne trade routes across the Strait would be affected and as a result any ships or tankers or carriers of oils, gas or other goods would either be destroyed because of the possible war across the Strait or will lie idle in the ports, thus, stopping any kind of transport in and out for countries in the GCC like Kuwait and Qatar. It is, therefore, important for all the major players in the import and export industry to take necessary steps so as to protect their goods from being spoiled.
One of the key players in any supply chain industries are the distributors of goods. Distributors in sectors like retail, hospitality and real estate would be the worst hit amongst all (Standard & Poor’s, 2012). Without proper storage facilities, supply of the goods will last for only few weeks or months (hardly). Distributors need to ensure that there is efficient supply of most necessary goods and should get rid of products that are not that important or will be of less demand during such crisis. The volume of essential food items like snacks, meat, flour, baked products etc. which can last long should to be kept large as compared to other goods. Livestock food items like meat, fish etc won’t last long and should be medially stored. The distributors need to check the capacity of the warehouse, larger the better, because during such crisis there will be a huge demand-supply gap.
The main constraint due to the closure of the strait is the supply of goods into the countries. In sectors like manufacturing, the goods imported are used as inputs to produce end products, thus, all the factories would be shut down with no supplies of raw materials. In order to avoid this, companies need to import using longer routes which would increase the cost of transportation. Distributors play a vital role in the supply chain as they store the imported goods and further supply to the retailers and shop-owners as per the demand. However, they are also limited by capacity, thus, the operational implications due to the closure of the Strait might affect only the importers in the beginning but gradually it would reach the end user of the products- common man in most cases- making the products even more costly.
With so many constraints on the operations of different sectors, the economies of the Middle East region would be sinking into recession and if proper steps are not taken, then supply of the goods would dry up creating havoc in the nations. However, there are alternate trade routes which can be used for transport of all types of goods except Natural gas, as there are no pipelines built to transport Gas in the Middle East. Saudi Arabia and other lesser affected countries would be of great help during the time of crisis as most of the GCC countries would be handicapped without the Strait of Hormuz. The governments of all the countries need to be proactive and take necessary steps before the situation goes out of its control. The revenues of the countries would reduce by more than fifty percent, for some countries there even might be no revenues as they are completely dependent on exports. There will be a large supply-demand gap and prices of anything and everything would hit the roof making it difficult for the people of the Middle East. As a result, there might be civil unrest in the country making the situation for the government even worse. The closure of the Strait would result in a war in the Gulf region as there are many military forces guarding the Strait. Therefore, the expenditure for the governments will keep on increasing with less or no revenues at all in the worst case scenario.
References
U.S. Energy Information Administration, 2011, viewed 05 April 2012 <http://www.eia.gov/pub/oil_gas/petroleum/analysis_publications/oil_market_basics/trade_text.htm#Crude versus Products>
International Institute of Strategic studies, 2012, ‘Naval Forces around the Strait of Hormuz’, viewed 05 April 2012 <http://www.iiss.org/publications/strategic-comments/past-issues/volume-18-2012/february/strait-of-hormuz-irans-disruptive-military-options/>
The Cooperative Council for the Arab states of the Gulf, ‘Foundation and Objectives’ viewed 05 April 2012 <http://www.gcc-sg.org/eng/index895b.html?action=Sec-Show&ID=3>
Organization of the Petroleum exporting Committee, ‘Saudi Arabia facts and figures’ viewed 05 April 2012 < http://www.opec.org/opec_web/en/about_us/169.htm?
Organization of the Petroleum exporting Committee, ‘Saudi Arabia facts and figures’ viewed 05 April 2012 < http://www.opec.org/opec_web/en/about_us/169.htm?
Organization of the Petroleum exporting Committee, ‘UAE facts and figures’ viewed 05 April 2012 < http://www.opec.org/opec_web/en/about_us/170.htm?
Organization of the Petroleum exporting Committee, ‘Qatar facts and figures’ viewed 05 April 2012 < http://www.opec.org/opec_web/en/about_us/168.htm?
Organization of the Petroleum exporting Committee, ‘Kuwait facts and figures’ viewed 05 April 2012 < http://www.opec.org/opec_web/en/about_us/165.htm?
Alpen Capital, June 2011, ‘GCC Food Sector’, viewed 05 April 2012,
< http://www.alpencapital.com/downloads/GCC_Food_Industry_Report_June_2011.pdf>
LTD Management, ‘Wanted: Logistics Center for the Gulf’, viewed 05 April 2012
< http://www.ltdmgmt.com/wanted-logistics-center.asp>
JD08
But you can order it from our service and receive complete high-quality custom paper. Our service offers Supply chain essay sample that was written by professional writer. If you like one, you have an opportunity to buy a similar paper. Any of the academic papers will be written from scratch, according to all customers’ specifications, expectations and highest standards.”
