With a return to the pre-Iran conflict energy status quo unlikely, a Hormuz toll may be the next best option – but Gulf states would pay the most.
With a ceasefire on 8 April, the conflict between the United States, Israel and Iran has reached – for now – a sort of stalemate. The conflict has had a huge impact on global energy supplies, while incurring staggering military costs1 and laying bare the uncomfortable truth about the power of asymmetric warfare2. Iran’s ability to close off the Strait of Hormuz energy chokepoint has become a defining issue.
One major issue now is to find a way to keep the strait open and energy supplies flowing. This analysis explores an option for this, which now seems to be part of Iran’s 10-point ceasefire plan, put forward on 8 April3: continuous control of the strait by Iran and potentially a toll paid to Iran in return for allowing oil tankers to transit the strait.
We first discuss the economics of a toll and show that the Gulf states would pay around 85 percent of the toll cost, while the rest of the world bears only a small fraction of the toll. Regaining access to oil from the Gulf would, overall, far outweigh the cost of the toll.
We then discuss two major counter-arguments and trade-offs in that scenario that policymakers must weigh up. We conclude that European policymakers need to face up to a world without a single hegemon able or willing to enforce international law. While negotiating a settlement with Iran is not a very attractive option – particularly compared to free circulation of oil tankers, as was the status quo before the US and Israeli attack on Iran – the alternatives now are even less attractive. Markets have accordingly reacted very positively to the announcement of a ceasefire and the start of US-Iran talks.
Who pays the toll? A tax incidence analysis
A transit toll on the Strait of Hormuz would be a tax on a chokepoint. Iran controls the bottleneck, from which it extracts rents.
The most important, perhaps counterintuitive, insight from economic analysis of a Hormuz toll is that the world economy is largely indifferent to a Hormuz toll as long as oil supply is restored. The burden does not fall on global consumers, but overwhelmingly on the Gulf states that supply the oil that transits the strait. But even the Gulf states would be better off than in the current conflict situation in which their oil exports have been stopped.
Understanding why requires a brief foray into the economics of tax incidence. Consider a world oil market with a single global price. A Hormuz toll acts as a per-barrel tax on Gulf oil exports – a partial supply tax, since Gulf states account for a share of around 20 percent (s = 0.2) of world supply. Iran imposes a per-barrel toll T on all tankers transiting the strait. The toll creates a price wedge. Gulf exporters get (P – T) per barrel; the world market price P is bid up as supply contracts. Rest-of-world (RoW) producers face only the world price and supply more as P rises.
Denoting world demand with D, Gulf supply with Sg, and RoW supply with SRoW, the market-clearing world price is determined by the market-clearing condition:
D(P) = Sg (P − T) + SRoW (P)
Differentiating with respect to the toll T (bearing in mind that P depends on T), and using εG to denote the Gulf supply elasticity, εRoW the rest-of-world supply elasticity and εD the global demand elasticity, yields, after some re-arrangements:
θ is the pass-through rate, ie the fraction of the toll showing up as a higher world oil price. It reflects how much global consumers of oil have to pay more for oil given a $1 increase in the toll. Mechanically, Gulf exporters have to bear (1 − θ) of the toll per barrel on their entire export volumes (since they cannot sell their oil at a higher price than the world price).
The formula reflects the simple insight that tax incidence is determined by the relative supply and demand elasticities. In this case, the supply elasticity is relatively small, as the tax is only applied on s = 0.2 of the supply. Because Gulf exporters represent only one-fifth of world supply, their ability to drive up the world price by threatening to withhold supply is limited. The percentage reduction in Gulf supply as seen by the world market is 0.2 * εG.
Table 1 shows how the incidence is shared between oil consumers (that pay a higher world oil price) and the Gulf oil exporters (that pay the tax but benefit from a higher world oil price). Estimates of oil market elasticities (Caldara et al, 2019) find a short-run global demand elasticity of −0.08 and a supply elasticity of 0.084. Long-run demand elasticities are likely substantially larger as consumers around the world can shift to green energy supplies.
Table 1: Incidence of toll for four combinations of supply and demand elasticities
| Scenario | εD | εG (Gulf) | εR (RoW) | Consumer share (θ) | Gulf share (1−θ) |
| Baseline | −0.10 | 0.10 | 0.10 | 10% | 90% |
| RoW supply rigid (εR = 0) | −0.10 | 0.10 | 0.00 | 17% | 83% |
| Higher demand elasticity | −0.26 | 0.10 | 0.10 | 6% | 94% |
| Higher demand, RoW rigid | −0.26 | 0.10 | 0.00 | 7% | 93% |
Source: Bruegel using the formula with Gulf share s = 0.20.
In any scenario, the tax incidence falls largely on the Gulf oil exporters. In the baseline scenario, the demand elasticity is assumed to be relatively low (-0.1, close to the estimate by Caldara et al, 2019), while the supply elasticity is assumed to be 0.1 (also close to Caldara et al, 2019). This implies that 90 percent of the tax is paid by the Gulf exporters and only 10 percent by world consumers. If RoW supply is rigid (implying that the world maintains a strict oil sanctions regime on alternative supplies, for example from Russia), the pass-through to consumers rises but remains below 20 percent. The Gulf states absorb four dollars of every five. A higher demand elasticity, for example as consumers switch to green energy alternatives, pushes the burden even further onto Gulf exporters, as consumers turn away from oil with greater ease.
Iran reportedly wants a toll in the range of $2 million per vessel5. Given that ‘very large crude carriers’ – the dominant tanker class for Gulf exports – carry approximately 2 million barrels, this translates to roughly $1 per barrel. At $1–$2 per barrel, the world oil price would rise by only $0.05–$0.40 per barrel, relative to the pre-war level – a small fraction of the rise of about $35-$40 per barrel since the beginning of the war. Gulf exporters would absorb between 80 percent and 95 percent of the toll covering approximately 20.4 million barrels per day of exports, or an annual cost of $6 billion to $14 billion.
For the world economy, the dominant beneficial effect would be that global oil supply increases by 20 percent again and prices will likely fall back to what they were before. The world economy would barely notice the toll. Though they would largely have to pay the bill, the Gulf States would still benefit hugely, compared to the conflict situation, as they could restart oil exports. Since oil extraction costs in the Gulf are extremely low, for some fields as low as $10/barrel, Iran could extract a much larger rent – considerably more than $2 million per vessel. In purely rational terms, any toll smaller of less than 0.8*(P-Extraction cost) would be still be a better option for the Gulf than no oil exports at all.
Objections to a Hormuz toll
A first objection is that toll revenues would directly benefit Iran’s Islamic Revolutionary Guards Corps (IRGC). Western countries indeed have identified IRGC as suppressing domestic opposition and supporting terrorism elsewhere. The IRGC is sanctioned by several Western countries so ship owners paying tolls to them could be subject to fines and complications with various insurance policies. However, the broader geopolitical cost of the conflict situation may be even higher: inflated oil prices could lead to between $45 billion and $151 billion of additional revenues for Russia, depending on the length of the oil supply interruption and the increase in oil prices (Hilgenstock et al, 2026). In contrast, with Russian exports at about 4.5 million barrels per day, a rise of $0.05–$0.40 per barrel relative to the pre-war level would mean only $82 million to $657 million per year in additional revenues for Russia.
A second objection is that paying a toll legitimises Iran’s coercion and sets a precedent under international law that other regimes may want to pursue. To be clear, Iran charging a toll would violate international law. The Strait of Hormuz connects two seas: the Persian Gulf and the Gulf of Oman. Under the United Nations Convention on the Law of the Sea, all ships enjoy the right of ‘transit passage’, which must be continuous, expeditious and unobstructed. The Strait of Hormuz is also, legally, not comparable to the Suez Canal: while an international treaty requires “the free use of the Canal, in time of war as in time of peace” and forbids blockade, the Suez Canal Authority is authorised through its legal ownership of the canal to levy dues for the use of the infrastructure6.
There are at least two counterarguments to the second objection and concerns that a Hormuz toll would trigger other nations to attempt similar schemes. First, Iran is now under substantial threat (including that its “whole civilisation” will be erased7) and military pressure, a situation other countries would not like to experience. Second and more importantly, Iran has already shown to the world the power of asymmetric warfare at chokepoints, inviting others, including non-state actors, to imitate. They have shown that for those imposing blockages, asymmetric warfare costs little, while non-payment is costly for the world and therefore not credible.
As a toll deal with Iran’s IRGC is undesirable, the Gulf states and Europe have a strong interest in striking it only if all other options look much worse. Investment in pipelines would be needed to ensure that Iran’s leverage falls. A rapid expansion of the Gulf’s and Europe’s capacity to counter asymmetric warfare would be needed to counter Iran’s power of asymmetric warfare, which the badly planned US/Israeli attack has revealed. Policymakers have realised that they cannot afford the illusion that the status quo ante can be brought back, and instead must evaluate options in a second and third best world.
Source : Bruegel
