Commentary: The Strait of Hormuz Closure Is Rewriting Global Risk Premiums

1. On March 2, Iran announced it was closing the Strait of Hormuz, a development carrying an unprecedented degree of seriousness compared to previous threats.[para. 1]

2. With the U.S. military on high alert, speculation centers on Kharg Island as a possible target for U.S. ground operations. Kharg Island, though only 49 square kilometers, is essential as it handles almost 90% of Iran’s crude oil exports. The U.S. Army’s 82nd Airborne Division can deploy over 4,000 troops to the Middle East within 18 hours if needed, under Defense Secretary Pete Hegseth.[para. 2]

3. The escalation from proxy conflict to direct confrontation is fundamentally changing the way the world values the Strait of Hormuz. Historically processing about 20 million barrels of oil daily—20% of the global total—the strait is essential to oil exports from Saudi Arabia, the UAE, Kuwait, and Qatar. At its narrowest, it measures just 33 kilometers.[para. 3]

4. For over 50 years, energy prices inherently relied on the assumption that the Strait of Hormuz would always remain open. Even during prior major conflicts like the Iran-Iraq War and the Gulf War, it never fully closed, keeping risk premiums low. On March 2, that assumption collapsed. Brent crude prices surged from $72.90 to almost $120 per barrel, with forecasts it could exceed $200 if the crisis intensifies. The market is now urgently reassessing the availability and reliability of Middle Eastern oil supplies in light of possible permanent instability.[para. 4]

5. From a sovereign credit standpoint, an entirely new risk—labeled the “channel safety coefficient”—must now be integrated into energy and credit models. Where once geography was a background factor, the navigability of key straits has become central to risk assessments, requiring a rewrite of global energy value frameworks.[para. 5]

6. The impact reaches far beyond oil prices. For the past two decades, Gulf nations (Riyadh, Abu Dhabi, Dubai, Doha) were seen as politically neutral and financially secure. The rise in Iranian attacks on U.S. bases within the Gulf has undermined this perception. Investors now view Gulf sovereign credit as exposed to geopolitical rather than simply financial risks.[para. 6]

7. The UAE, especially Dubai and Abu Dhabi, finds itself most at risk due to its ties with Israel, making it a likely Iranian target. Assets traditionally viewed as safe havens, like Dubai real estate and Abu Dhabi’s sovereign wealth funds, are now seen as risky.[para. 7]

8. The bond market reacted immediately, with a notable 30-basis-point widening in Abu Dhabi’s 10-year sovereign bond spread—significant movement for AA-rated debt. This shift occurred even though higher oil prices should, in theory, boost these countries’ fiscal outlook, suggesting geopolitical risk now outweighs economic fundamentals.[para. 8]

9. A critical concern is whether U.S. security guarantees under President Donald Trump will continue to underpin the Gulf's stability premium. With risk now permanently factored into credit assessments, major global funds are reducing their exposure due to persistent instability.[para. 9][election_info]

10. There is also a paradox concerning the U.S. dollar. In the short term, it remains the ultimate safe haven, driving capital inflows and a rising Dollar Index as instability grows—monitored by Treasury Secretary Scott Bessent.[para. 10]

11. However, this reliance may undermine dollar hegemony in the long run, as non-Western countries view this dynamic as a weaponization of U.S. financial power. Saudi Arabia is reportedly re-evaluating the petrodollar system, and even considering local currency oil settlement, which could influence the entire Gulf region. Thus, while the dollar is secure today, its long-term dominance is increasingly questioned.[para. 11]

12. The practical effect is dual: energy-importing emerging markets now confront rising inflation and currency depreciation, while those reliant on dollar-denominated debt face unsustainable borrowing costs as global risk premiums rise.[para. 12]

13. The closure of the Strait of Hormuz has triggered a far-reaching reevaluation of the “Gulf premium”—transforming geopolitical risk from a rare event into a constant. This new “Hormuz assumption” must now underpin all regional and global strategic economic frameworks.[para. 13]

14. The author, Wang Jiachun, is a senior researcher at Anrong Credit Rating with a background in strategic risk for a policy bank. The piece expresses his own views, not those of Caixin.[para. 14][para. 15]