Ambrose Evans-Pritchard
The world has lost over a tenth of its daily oil supply, along with critical volumes of jet fuel, diesel and refined petroleum products. Now prepare for loss of the next tenth, hitting just as all the short-term fixes are exhausted.
This is not a remote tail risk. It is an all-too-plausible outcome as Donald Trump concentrates the 82nd Airborne Division and US marines to “take the oil” on Iran’s Kharg Island.
The supply crisis has already escalated over the last few days in two critical theatres beyond the Strait of Hormuz. Goldman Sachs says investors are buying call options on oil at a strike price of $US450 a barrel.
The pro-Iranian Houthis in Yemen have finally joined the Gulf war, opening a second front in the Red Sea and endangering a further 6 per cent of global oil supply.
They have started with a symbolic strike against Israel but have also threatened to hit ships in the Bab al-Mandeb Strait – the “Gate of Tears” – or tankers loading at the Saudi oil terminal at Yanbu on the Red Sea. The “dual bottleneck scenario” is in play.
“The Houthis could effectively block all Red Sea shipments,” says Helima Croft, a former CIA analyst now at RBC Capital Markets. “It would only take a relatively small show of force to push crude another leg higher.”
Trump is oscillating by the hour between Armageddon and insouciance, musing out loud that he may just wash his hands of the war and leave the Strait of Hormuz closed – a revenge of sorts against Asia and Europe for refusing to join his capricious “excursion”.
But if he does that, the Iranian regime will not return to the status quo ante.
Hardliners have tasted victory – by surviving – and will press their advantage, imposing a permanent toll fee on tanker traffic and acquiring enormous political leverage over the Gulf.
It would be the worst strategic reverse for the US since the Vietnam War and a field day for the Russo-Chinese axis.
“We are at a critical juncture in the conflict, one that could lead to far-reaching and potentially devastating outcomes that will affect the life of all of us,” says Danny Citrinowicz, former head of the Iran desk at Israel Defence Intelligence.
Trump says America “doesn’t need” the Strait of Hormuz.
Who put that idea in his head? The US imports eight million barrels a day (b/d), either refined products or heavy crude to balance its refineries. It has four times the petrol dependency per capita of the UK.
Internal US prices of jet fuel, diesel, fertilisers, sulphur and aluminium are all shaped by the Gulf through global markets. Iran would control a third of the world’s helium shipments, giving it a partial stranglehold over a critical input for semiconductors.
Trump today told Britain to “get your own fuel” from the Gulf, to which one can reply only that the UK receives almost no physical supplies of oil or liquefied gas via the Strait of Hormuz, though it does require jet fuel from Kuwait.
For what it is worth – not much in an integrated global oil market – UK is one of the least dependent countries in Europe and Asia on Gulf shipments. Overall, the US is actually more dependent.
The US Maritime Administration is taking the Houthi threat seriously, even if Trump shrugs it off. It has issued an alert against attacks all down the Red Sea and as far as the Somali Basin.
It has told US-flagged and owned ships to “go dark”, switching off their identification transponders. They should not use unsecured Wi-Fi and should stay in contact with the US Fifth Fleet Battle Watch and – interestingly – UK Maritime Trade Operations.
It is a racing certainty that the Houthis will pull the trigger if Trump attacks Kharg Island and carries out his threat to “conclude our lovely ‘stay’ in Iran by blowing up and completely obliterating all of their Electric Generating Plants, Oil Wells and Kharg Island (and possibly all desalinisation plants!)” – a threat to commit wholesale war crimes.
Saudi Arabia has ramped up flows to 5.8 million b/d through its East-West pipeline to Yanbu, a technical feat that has greatly reduced the global shock so far.
David Fyfe, the chief economist at Argus Media, says prices will reach traumatic levels if the Red Sea now comes under fire and remains closed for weeks.
“You can pick any arbitrary number – $US200, or anything you want – the risk is that we’ll see huge demand destruction, inflation going through the roof and global growth shuddering to a halt. It is a horrible thought,” says Fyfe, who used to run the oil division at the International Energy Agency.
Thousands of miles away, the Ukrainians have temporarily knocked out 40 per cent of Russia’s oil exports, shutting the Ust-Luga oil terminal on the Baltic and impairing the nearby facilities at Primorsk. It is the biggest disruption of Russian exports since the Ukraine war began. The world has lost another 1.8 million b/d.
An attack on Kharg Island would be the crowning disaster. It is hard to discern the strategic coherence of a US ground assault on Iran’s main oil terminal. Such action would not open the Strait of Hormuz. It would guarantee that the strait remained closed as Iran’s Revolutionary Guards fought an asymmetric war of guerrilla resistance.
It would cut off a further 2.4 million b/d of world oil supply. These Iranian exports make up the lion’s share of the crude shipments passing through the strait at the moment. The barrels mostly go to China but that frees up oil for the world market.
Citrinowicz says the whole idea that Washington can reopen Gulf shipping with a token military force is illusory.
“Iran does not need to physically control every inch of the strait to disrupt it. Even if US forces or their partners were to seize key points on nearby islands, Iran could still strike tankers using drones, missiles or naval proxies operating from a distance,” he says.
The Kharg facilities would be useless to the US without the hinterland of Iran’s oil fields.
Trump’s 15,000-strong force would be far too small to hold more than a sliver of Iran’s territory or to ferret out Iranian drone cells operating from caves. It took 200,000 troops and long years to quell Iraq (if quell is the right word), a country with one quarter of Iran’s population.
Trump says the bombing campaign has already achieved “regime change” in Iran. Indeed it has, consolidating the power of the most virulent bitter-enders. It has scotched the snake, not killed it.
“What we are seeing in Iran is a transformation within the regime itself, one that has made it more extreme,” says Citrinowicz.
The assassination of Ayatollah Ali Khamenei has set off a fateful chain of consequences, not least because the ageing cleric opposed nuclear weapons on moral grounds. He held together a mosaic of competing power centres, preventing dominance by the ultra-hardliners of the Islamic Revolutionary Guard Corps (IRGC).
Even if the war ends today, it will take months to restore oil output and years to repair Qatar’s terminal for liquefied natural gas.
“The outcome is not a ‘Venezuela scenario’ but something closer to North Korea: a system increasingly dominated by the IRGC,” Citrinowicz says.
The guards still hold stockpiles of 60 per cent enriched uranium, still control the world’s energy artery and are still able to harass the region.
“It is clear that Iran will rebuild its capabilities, and it will ultimately succeed in doing so,” Citrinowicz says.
Vali Nasr, the author of Iran’s Grand Strategy, a political history of the country, says the White House has misunderstood the country on every level. The hated clerical regime was dying and would have collapsed internally if outsiders had left it well alone.
The US-Israeli attack – and Trump’s hideous delight in inflicting violence – has given it a new and more dangerous lease of life.
“This attack will have a huge emotional impact on Iranians. The more they fear the destruction and plunder of Iran, the more they will resist,” Nasr says.
The Iranian people nurse much the same grievance as the Chinese over the century of national humiliation. Neither was colonised but both were occupied and pushed around – in Iran’s case by the British and the Russians, followed by the Americans after the CIA-backed coup against Mohammad Mossadegh in 1953.
Nasr says Washington fixates on the Islamist character of the regime, but its own leaders have always pitched their revolution as something of a national liberation movement, blending their toxic theocratic ideology with a whiff of Frantz Fanon and Che Guevara.
Even if the war ends today, it will take months to restore oil output and years to repair Qatar’s terminal for liquefied natural gas.
RBC Capital estimates that 11.6 million b/d of oil is currently shut down. Each week the war goes on, the greater the permanent damage to well pressure. If the Red Sea is closed too, the giant Saudi fields will also suffer structural degradation.
All the easy buffers are being used up. The lifting of sanctions on Russian and Iranian oil – another Trumpian masterpiece – has released just days of extra supply from barrels floating on water.
The emergency release from the US strategic petroleum reserve is a one-off measure that risks backfiring. The reserve cannot fall much lower before threatening the chemical integrity of the storage salt caverns.
JPMorgan says the world is facing a “ticking time bomb” as physical shortages hit fresh regions one by one: first South Asia, then the Far East, then Europe and finally the Western Hemisphere, reflecting tanker travel days from Hormuz.
Every corner of the globe will be hit by April 20 or thereabouts. Regional prices will converge via arbitrage and there will then be a planetary oil crisis with very few places left to hide.
If it’s any comfort, at least we may see regime change in Washington.
Telegraph, London
The Business Briefing newsletter delivers major stories, exclusive coverage and expert opinion. Sign up to get it every weekday morning.
