Trump's 20% Strait of Hormuz fee explained: How it works and why oil prices may rise

President Donald Trump on Monday asserted that the US would once again start blocking Iranian ships passing through the Strait of Hormuz and proposed a 20% fee for all other cargo shipped through the waterway.

Trump’s announcement that ‘the US would act as the Strait's GUARDIAN’ further escalated tensions with Iran, deepening the crisis over control and access to one of the world's most critical shipping routes.

“The U.S.A. will be, from this point forward, known as ‘THE GUARDIAN OF THE HORMUZ STRAIT,’ but as such, and as a matter of FAIRNESS, will be reimbursed, at the rate of 20% on all cargo shipped, for any and all costs necessary to do the job of providing safety and security to this very volatile section of the World,” Trump said in a Truth Social post on Monday.

Trump also said “the process and formation” of his plan “will begin immediately.”

The White House, however, did not provide other details on Trump’s proposal, including how it would be administered or whether it had been communicated to US allies in the Gulf.

Here are the key questions surrounding Trump's proposal.

No clarity on how the fees will work

Noting that there is still no clarity on how the fee would be calculated, John McCown, a senior fellow at the Centre for Maritime Strategy, told CNN, “Is it 20% of what our cost on the blockade is, somehow divided by the number of ships?”

“Other possibilities include 20% of the costs the US Navy incurs to escort cargo or a 20% charge on the value of the goods being transported.”

But one thing is for sure – the fees would be high enough ‘that no party is willing to pay it’

Shippers usually pay carriers 2%-3% of the value of their goods in fees, but a fee that is almost 10 times higher would make the system unaffordable.

Oil prices to jump further

The development threatens to raise fuel costs. A 20% charge would amount to about $32 million for a fully loaded very large crude carrier at current oil prices. That’s far higher than the tolls that have been charged by Iran, which have previously been described as reaching $2 million by people familiar with the situation.

In fact, oil prices extended gains to session highs on Trump’s comments, while stocks and bonds fell.

The price of Brent crude climbed 4.1% to $86.73 a barrel after soaring nearly 10% on Monday. U.S. benchmark crude was up 3.1% at $80.55 a barrel.

Oil prices are still below their wartime peak of nearly $120 a barrel, but uncertainty over the future stability of supplies has deepened as the U.S. and Iran each assert they control the Strait of Hormuz.

But is this even legal?

The Strait of Hormuz is an international waterway, and under international law, all vessels have the right of free passage. Iran has previously imposed a service fee on vessels, technically a toll, which was definitely not legal. Those charges, however, are not currently in place.

But what Trump has proposed would be legal under international law as long as the payment remains optional, James Kraska, a professor of international maritime law at the US Naval War College, told CNN after reading his post.

Now shipping companies can decide whether to pay for protection, and those who don't pay can still use the route.

The Strait of Hormuz is a critical conduit for energy and other commodities, having provided passage for about a fifth of the world’s oil flows before the US and Israel began strikes on Iran in late February. Iran’s efforts to close the waterway during the war pushed up energy prices globally and created political blowback for Trump.

The interim peace agreement between the two countries provided for toll-free commercial shipping during a 60-day negotiating window, and Trump celebrated the pact by touting the potential impact on gasoline prices and the economy, an acknowledgement of just how eager he is to put the conflict behind him.