On Wednesday evening, President Donald Trump officially signed a Memorandum of Understanding with
Iran, a deal that sets off a 60-day ceasefire and longer-term nuclear talks between the two nations. It also, critically, reopens the Strait of Hormuz, that narrow waterway between Iran and Oman that usually serves as one of the globe’s vital energy shipping routes, with 20 million barrels of oil moving through daily.
By Thursday morning, 10 vessels that had been stranded for all 110 days of the US-Iran war began moving out of the area, according to Windward, a maritime intelligence firm. The Strait of Hormuz seems open for business.
But experts say that US consumers shouldn’t expect gas prices—which have
jumped more than 35 percent nationally since late February—to recover soon. Shippers are still nervous about the tenuous peace in the Strait, which remains seeded with an indeterminate number of underwater mines. It doesn’t help that Trump continues to threaten violence in the area. “We will bomb them” if Iran doesn’t permanently shut down its nuclear program, the president told reporters Wednesday. “It’s amazing what bombs can do.” Meanwhile, the machinery of oil production is only just grinding back to a start.
“For the consumer, the big thing to realize is that there's no sign that prices are heading back to February levels just yet,” says Jason Miller, a professor of supply chain management at Michigan State University’s Eli Broad College of Business. “The global oil supply-demand balance, big picture, has been incredibly disrupted.” Right now, he says, people who buy gas, food, fertilizer, and anything else dependent on oil-based products shouldn’t count on a rapid recovery.
Though crude oil prices have fallen since the memorandum’s announcement, consumers would be wise to budget for the higher wartime prices for the longer haul.
“This is an incredibly fragile situation,” Miller says. “None of these things would have happened if you had not had the war.”
The Shipping News
Jakob Larsen, the chief safety and security officer at BIMCO, the world’s largest international shipping organization, said in a written statement Thursday that the industry still views the Strait as a safety risk for vessels. Its central part is “mined and un-navigable,” he wrote, which means ships’ safest routes right now are likely in narrower channels closer to Iran or Oman. The memorandum did not include important details that will determine how the next weeks and months will look, shipping-wise: which routes are safest, how and when ships might move in opposite directions, whether militaries will get involved with standard operations, or whether Iran might impose tolls.
“We advise shipowners to continue doing thorough risk assessments and appeal to all parties to put the safety of seafarers first,” Larsen wrote. “Credible assurances from both sides of the conflict must be given before traffic can resume fully to pre-conflict levels.”
Part of the issue is that no one knows exactly how long it will take to make the Strait safe enough for shippers and their insurers. Routes “have got to be de-mined,” says Michelle Wiese Bockmann, a senior maritime intelligence analyst at Windward, and “nobody knows how long that will take—six weeks or six months.” Earlier this week, Trump said the effort to clear mines is
already underway. The effort could include several countries, minesweeping ships, underwater drones that use sonar emitters to locate seafloor anomalies, military divers, and even US Navy-trained mine-detecting dolphins (though CNN reported last month that dolphins are unlikely to be currently operating in the area).
The war may have permanently transformed global shipping, now that Iran understands it can shut down the strait, albeit at some cost. A critical open question is whether the country will be permitted to toll ships passing through the strait, a possibility
that’s been floated in recent weeks. Depending on the dollar amount, tolls could add extra operating costs—and for buyers, higher prices—to an already difficult maritime shipping situation. But it could also create a dangerous new model for a world that has for more than 30 years recognized the right of transit through natural straits.
“It would be a very worrying precedent,” says Bockmann. If other countries are able to toll their waters—the Strait of Malacca, for example, which carries oil and natural gas from the Middle East to Asia and is sandwiched between Indonesia and Malaysia—“you can imagine what chaos would break out,” she says.
Oil Trouble
The particulars of the oil industry will also determine how much the average consumer will have to spend on everyday products in the months to come. Miller predicts “quite a bit of volatility in oil prices” because global inventories have dropped so low, and it’s not yet clear when interrupted production can restart in the region. While the big news right now is that ships are finally leaving the Persian Gulf, what matters in the coming weeks will be how many enter to load up with oil.
Petroleum-based products, like the plastic packaging used for many food products, will likely stay pricier for at least the next month or two, Miller says. “The best-case scenario is that the pace of inflation slows, but it’s a faster pace of inflation than where we were at before this war.”
The oil crunch has not been as dire as experts predicted months ago because of a few fortunate breaks. For one, the world happened to have ample global crude oil inventories when the war kicked off earlier this year. Also, China dramatically decreased its oil imports, which kept demand steadier despite the global volatility. Did the country draw down its significant reserves? Stop refining oil? Fill the gap with coal? Dive even further into electrification?
China still isn’t providing much clarification into what measures it has taken, though
global stats suggest the reserves and reducing refining was at least part of the answer. How China reacts now—will it get back to importing oil?—wil help determine whether prices keep inching downward or stay at the last weeks’ higher levels. Choices made in Beijing play a role in how much you’ll pay at the pump.
One thing is for certain: Things aren’t going back to the way they were. “You’re going to see everybody try to build more resilience” against oil shocks, Miller says.
One weird winner: electric vehicles. In a world where straits can shut down at any time, buyers (and the governments smart enough to create incentives for them) will be increasingly likely to choose the cars that let them get behind the wheel and go, regardless.
<small>Source: Wired</small>
