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Strait of Hormuz is a sea passage between the Gulf Cooperation Council countries and Iran which is one of the most important choke point of world. This is the main source through which around 30 percent of world's crude oil flow through cargo ship and transmitted to different countries. This report is about the issues that are arises between Iran and American government, there are chance that Strait of Hormuz get closed which highly affect the international trade. So, this assignment talks about the importance of Strait of Hormuz in global trade and impact of this decision over GCC importers and other countries (Rahmanpoor and et. al., 2014). Further it describes about various logistic services and resources that will be highly demanded after commencement of this decision and routes through which import activities can be continue by GCC countries. Apart from this it also explains about various measures that can be used by GCC distributors for safeguarding their inventories.
Straits of Hormuz is a narrow strait which links the Persian Gulf (west) with the Gulf of Oman and the Arabian Sea (south-east). This strait is 35 to 60 miles wider and separates the Arabian Peninsula from Iran. This straits is the main sources of import export operations between Iran and various ports of Persian Gulf through marine (Bastami and et. al., 2013). But due to political issues between Iran government and American, they are planning to close this strait. If this strait gets closed then it would be the biggest loss to oil import-export transactions. As it is the main way through which oil is exchanged throughout the world. The straits of Hormuz is very essential for global trade because,
Hence, if this strait is get closed then it would be the biggest loss to Iran as if all the U.S allies refuse to import oil from Iran then the oil is expected to drop lower than 1 million barrels per day (Iran Is Threatening to Close the Strait of Hormuz, 2018). Its current rate is 20million barrels per day.
GCC is abbreviated as Golf Cooperation Council, which is a political alliance of six major countries of Arabian Peninsula. It includes Bahrain, Qatar, Saudi Arabia, Kuwait, Oman and United Arab Emirates. It promotes security, economic, cultural and social cooperation between six countries. As strait of Hormuz and Persian Gulf are connected with marine environment, closer of this strait would have a huge impact over the ecosystem of these connected regions (Bauman and et. al., 2013). As Gulf is the major source of drinking water for millions of inhabitant reside in GCC countries, with the help of desalinization plant. Any contamination to this water will affect the population reside in that area.
Apart from this, water of Gulf is home for variety of species including turtles, fin-less porpoise, fishes etc. which get affected with the closer of this strait, as this action will lead to increase in pollution in water. These species are also the major source of food for millions of bird that migrate to reside in this region during winter. On the other hand, it also affects the GCC countries economical as countries like Qatar, Saudi Arabia and Oman are consider to be the largest exporter of oil. This is major source of countries financial health, as they finals the deal of millions every day. Straits of Hormuz closer will affect the revenue of these countries to a large extent.
The closer of Straits of Hormuz will have a huge impact over the economy of countries that are the biggest importers of GCC countries. As, GCC countries are consider to be the biggest export of oil and natural gases which they transmit through this strait using cargo ships. It exports approx. 90 percent of total oil in the world and if this strait gets close it will affect the importer countries. As the price of oil increases and they have to pay more for importing oil because after closing this straits supply of oil decreases which automatically increase the price of oil. Hence it affects the economic and financial condition of the country (Dadolahi Sohrab and Nazarizadeh Dehkordi, 2013). Apart from this they have to choose different alternatives to import oil from GCC countries such as through airways which costs higher than cargo ships.
On the other hand, it also results in decreasing the employment rate and job losses with the cutting off of import activities. As companies that relies over importing raw material for producing its final product are required to opt for different sources such as by air and others for importing their inputs (Khan, 2013). This leads to increase in their cost of production and may also get sever losses which results in closure of factories. This will lead to job losses, which further affect the economy of country.
Due to various political issue arises between the Iran government and Americans creates the chances of closing the Straits of Hormuz which a narrow strait of linking the Arabian and Persian sea . This will have a great impact over the import export activities of various countries which in turn will also affect the logistic companies functions. Therefore, being a regional business development manager of middle east division it is very essential to identify impact of this decision over the demand of logistic services for future planning. As majority of distributor clients belongs to GCC group countries and are involve in importing and distributing FMCG goods. Following are the logistic services that will be in demand after the closing of Straits of Hormuz:
Conflicts arises over Hormuz would be costly for economies of Gulf countries as it is one of the key maritime choke point of world. This narrow strait connects the Indian and Arabian ocean and also the mode for performing several import-export activities. Therefore, the decision of Iran to close the Straits of Hormuz due to some political issue will affect the global trade to a large extent. This will also disturb the import export activities between several countries. So in order to overcome this issue and for continuing the import activities, alternative routes are required to be identify through which goods can be imported within GCC countries . As countries like United Arab Emirates, Oman, Qatar and Kuwait will be highly affected as they are nearer to coast of Persian Gulf and are more involve in import-export activities. These countries highly depends on other nations for fulfilling their need for FMCG product.
In order to satisfy their demand related to import of goods, Global Logistic company have identified alternative routes and mode of transportation through which good can be delivered into countries like United Arab Emirates, Oman, Qatar and Kuwait. Following points describe about various routes that can be used by Global Logistic company for its UAE client are:-
Apart from this, company is also required custom clearance services as before export goods, distributor is required to take permission from the government of Iran for transferring their goods to another country. In addition to this permission from government of Yemen and UAE is required before entering the goods into the country.
For providing the logistic services to the client of GCC countries, Global Logistic company requires various resources in order to perform their operations effectively (Sooriyaarachchi and et. al., 2015). This will help them in continuing their import-export activities even after closing the Straits of Hormuz but through different routes. Following are the resources that are required by Global Logistic company for deploying services to their client are:-
Apart from this they are also required to invest capital for purchasing warehouses at different location. So that inventories can be kept at these stores for keeping them safe for long period of time. In addition to this, capital is also required while completing the formalities related to custom clearance.
Decision of Iran government to close the straits of Hormuz will highly affect the global business as well as economy of GCC countries. As this is the main way through which these countries export their commodities through cargo ships and import FMCG goods (Abramson, 2017). With the closing of this route, businesses of these countries will be witnessed by heavy loss. So they are required to identifying certain measures that will be beneficial for them in order to deal with this situation till the political issues get solved between the government of Iran and USA. Following are the short term measures that GCC distributors can adopt for dealing with event:
Insurance:- It refer to a contract in which insurer(entity giving insurance) promises the insured (who is taking insurance) to compensate for the loss that may or may not incurred in near future. For safeguarding their inventories, insurance will be the best option for GCC distributors as they can protect themselves from getting financial loss (Arvai, Prasad and Katayama, 2014). There are generally two type of insurance contract that may be opt by these distributors:
Just in time inventors:- This will be the another measure that can be used by GCC distributors for safeguarding themselves. Just in time inventories refers to a strategy where goods are produce only when and up-to that quantity which is demanded by customers. It focuses toward increasing the efficiency and decreasing the waste in production process (Safeguarding Inventory, 2018). By using this approach, distributors can minimize their inventory cost and maximize their operational efficiency. JIT is an inventory management approach that help distributors in keeping their inventory available for meeting the demand.
These are the safeguard measures that can be taken by distributors of GCC countries for protecting themselves from the loss that may be occur due to closing of Straits of Hormuz. By implicating insurance policies in their operations, distributors can perform their operations effectively with the fear of loss. As by entering into insurance contract these distributor can safeguard their inventories from future uncertainty that may result in sever losses. Hence, implication of insurance to their operation will be beneficial for distributor commercially.
Apart from this just in time process will also be beneficial for distributors as they get both commercial and operational benefits (Puig and Yee, 2017). By applying JIT, distributors can manage their stock as per the demand of their clients so it help in simplifying the work and also reduces the operational cost. On the other hand, reduction of wastage and excess storage of inventories will also help provide commercial benefits to distributors. Therefore, both the measures will help in safeguarding the inventories of GCC distributors for short term purpose.
In order to deal with situations that may occur because of the closer of Strait of Hormuz, it is recommended that GCC countries that must try to improve their relation with Iran so that they may drop their decision of closing the way. Apart from this distributors belongs to GCC countries and relays over export activities for operating their business must try to identify different routes through which they can continue their import-export activities. In addition to this they can also use different mode of transportation other than ship, through air ways i.e. cargo planes.
Apart from this options, distributors are also required to safeguard their inventories as this decision leads them to keep their inventories stock for longer period of time. During this period there are chances that inventories get damage or destroyed. So in order to deal with such uncertainties, they can take insurance policies that help them in safeguarding form financial losses. In addition to this they can also apply Just in time inventory approach that help distributors in maintaining their stock according to the demand of their client. This further help in eliminating the chances of wastage.
From the above given report it can be concluded that due the political issues arises between the Iran and USA government chances of closing the Straits of Hormuz increases which will results in heavier loss to international trade. This event has affected the business practices of various distributors which are involve in import-export activities for performing their operations, specially countries belongs to Gulf corporation. So in order to safeguard themselves from this losses they may take some short term measures like Just in time inventory approach and insurance policies for inventory. This will support GCC distributors both operationally as well as commercially.
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Bastami, K. D. and et. al., 2013. Polycyclic aromatic hydrocarbons in the coastal water, surface sediment and mullet Liza klunzingeri from northern part of Hormuz strait (Persian Gulf). Marine pollution bulletin. 76(1-2). pp.411-416.
Bauman, A. G. and et. al., 2013. Multiple environmental factors influence the spatial distribution and structure of reef communities in the northeastern Arabian Peninsula. Marine pollution bulletin. 72(2). pp.302-312.
Dadolahi Sohrab, A. and Nazarizadeh Dehkordi, M., 2013. Heavy metals contamination in sediments from the North of the Strait of Hormuz. Journal of the Persian Gulf. 4(11). pp.39-46.
Khan, S. A., 2013. Geo-economic imperatives of Gwadar Sea Port and Kashgar economic zone for Pakistan and China. IPRI Journal. 13(2), pp.87-100.
Rahmanpoor, S. and et. al., 2014. Distribution and sources of polycyclic aromatic hydrocarbons in surface sediments of the Hormuz strait, Persian Gulf. Marine pollution bulletin. 78(1-2), pp.224-229.
Sereshk, Z. H. and Bakhtiari, A. R., 2015. Concentrations of trace elements in the kidney, liver, muscle, and skin of short sea snake (Lapemis curtus) from the Strait of Hormuz Persian Gulf. Environmental Science and Pollution Research. 22(20), pp.15781-15787.
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