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Ever since the Iran War broke out at the end of February, the world’s supply chains have been thrown into disarray as oil prices escalated, the Strait of Hormuz largely closed to commercial traffic and the U.S. imposed a naval blockade on Iranian ports. With an interim ceasefire agreement now in place, companies can begin shaking off some of that disruption and making firmer plans for the second half of the year.
“For the last few months, manufacturing supply chains have been feeling the pressure following the eruption of conflict between the US and Iran and the subsequent closing of the Strait of Hormuz, which brought further supply chain disruption and escalating energy costs,” Joe Bush writes in The Manufacturer. “Now, it appears, light may finally be at the end of the tunnel as it has been announced that the US and Iran have agreed on a framework deal to end the war, which includes the Strait of Hormuz reopening.”
The Agreement’s Impact on Supply Chains
The Memorandum of Understanding (MOU) was signed by both countries on June 17, with formal peace talks taking place shortly after that in Switzerland. According to AP, the agreement calls for Tehran to dilute its stockpile of highly enriched uranium and waives U.S.-backed sanctions on Iran. The initial deal to end the war went into effect immediately after leaders from both countries signed it.
“The agreement calls for a permanent end to hostilities and starts a 60-day negotiating clock to reach a final deal on the future of Iran’s nuclear program, though Trump left the door open to resume attacks,” AP reports.
While the final details of the peace deal get sorted out, the world’s supply chains will be watching to see how quickly oil begins flowing and commercial shipping resumes through the Strait of Hormuz. A full reopening could ease some of the strain on energy supplies, for example, while also reducing costly rerouting and bringing more predictability back to freight and production schedules.
The bigger question is how quickly those benefits reach manufacturers, carriers and shippers after nearly four months of disruption. “Companies need to treat this as a window, not a resolution. Uncertainty persists, possibilities for renewed disruption linger and risk models now account for future disruptions,” The Manufacturer cautions. “However, while public statements suggest the strait will be effectively ‘open’ from the moment the deal is signed, others believe that in practice, implementation is conditional and dependent on events that have yet to unfold.”
In “Hormuz Reopening Would Offer Relief for Asia, but Economic Scars Will Remain,” The New York Times explains that the agreement will provide an “immediate reprieve, freeing hundreds of tankers laden with oil, gas, and fuel byproducts to begin making the monthlong journey back to Asian ports.” It says the reopening will offer near-term relief for Asia, the region outside of the Middle East that has borne the brunt of the economic fallout from the war.
Despite the positives, it also says the shock waves of the crisis are “likely to ripple through the end of the year,” or even beyond that. “…industry experts and economists caution that because trade flows have been disrupted for so long, global markets will need considerable time to normalize,” The New York Times adds, “meaning elevated inflation and supply-chain strains are likely to linger through the end of the year.”
No Price Cuts Yet
Consumers may also have to wait for some relief from the high gas, grocery and airline ticket prices they’ve been paying for the last few months. According to ABC News, even with the oil flowing again from the Middle East, it could take time for consumers to see a difference at local fuel pumps, supermarkets and other places they shop.
“Fighting over the Strait of Hormuz disrupted not only supplies of crude and refined fuel but also the supply chains for fertilizer, food and even footwear,” it adds. “Businesses expect higher costs to linger, which means their customers might need to prepare for that too.”
