Hormuz: Iran’s threat, London’s premium the chain that creates the oil shock

The actor creating the physical crisis environment is Iran. But the real practical mechanism that keeps tankers from entering the region and causes a sudden oil supply shock in global markets is the reaction of the London-based insurance market to this risk. Even if Iran doesn’t physically shut the strait completely to maritime traffic, the security threat it creates alone triggers the insurance mechanism. If insurers cancel policies or raise premiums so high that freight costs no longer make sense, shipowners refuse to send their tankers to that area. Sending an uninsured tanker through that strait is suicide.
Private reinsurance companies won’t take on billions of dollars of risk just because politicians ask them to. But if states step in and de risk the process, the system can reopen quickly. This happens in two ways:
Sovereign guarantee: Governments like the U.S. or the U.K. backstop insurers by saying, If you take losses, we’ll cover the bill through the treasury.
The U.S. Navy surges into the region and provides protection for commercial ships, like it did in the 1980s during the Tanker War or in the Red Sea.
China is the world’s largest oil importer, and the lifelines of that oil are the Strait of Hormuz and the Strait of Malacca. Energy security is Beijing’s weakest point. The U.S., on the other hand, is now a net energy exporter thanks to shale. So the U.S. has the luxury of using controlled tension in Hormuz as a major strategic weapon against China.
In short: Iran’s threat pulls the plug; the insurance market flips the breaker; and tanker traffic commercially stops even without a physical closure.