The Strait of Hormuz, Towards a Long-Lasting Solution

Massoud Karshenas, M. Hashem Pesaran and Ron P. Smith

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: The current restrictions on shipping through the Strait of Hormuz imposes significant costs on the global economy. Rather than attempting to reverse this situation through military means, a more viable approach may be to institutionalize the emerging arrangement in which Iran, in coordination with littoral states on the opposite shore, guarantees safe transit while charging a toll for service provision. Such an arrangement would resemble the system governing passage through the Turkish Straits under the Montreux Convention Regarding the Regime of the Straits. The likely toll would be small relative to the value of goods in transit or the immense costs associated with forcibly reopening the Strait. Moreover, a stable revenue stream could create incentives for Iran to maximize shipping throughput rather than restrict it. Attempting to open the Strait by military means and ensuring that the flow is sustained in the future, and not disrupted again, would require the U.S. to succeed in installing a more compliant government in Iran. It is very unlikely that the US could use naval and air power to deter or depose the present regime, defend ships transiting the Strait, or destroy all the Iranian munitions threatening shipping. The monetary cost of regime change in Iran is likely to be many times the $3-5 trillion estimate of the cost of the U.S. involvement in Iraq, compared to the total U.S. military budget of $962 billion for 2025. Iran has about three times the area and more than three times the population of Iraq in 2003. Regime change may not be feasible. Similar amounts were pent by the U.S. in Afghanistan and still failed to sustain a compliant regime.

Keywords: Shipping; Transit Costs; Global Supply Chains (search for similar items in EconPapers)
JEL-codes: F68 G22 (search for similar items in EconPapers)
Date: 2026-04-18
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.econ.cam.ac.uk/sites/default/files/pub ... pe-pdfs/cwpe2632.pdf

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:2632

Access Statistics for this paper

More papers in Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge
Bibliographic data for series maintained by Jake Dyer ().