A Malta-flagged oil tanker sailed through the Strait of Hormuz and arrived in Iraq's territorial waters on April 17. Even if the strait reopens, vanishing stockpiles and damaged refineries mean there is more pain ahead.Mohammed Aty/Reuters
In the digital age full of tech companies with market values matching the GDP of sub-Saharan countries, whose products and services are considered indispensable for everyday living – mobile phones, AI, VPNs, cloud storage, social media – it’s easy to forget that we still live in a physical world, where tangible commodities keep us and our economies alive, and are the source materials for the technologies we adore.
You can’t build an iPhone without aluminum and copper; you can’t drive a car with pistons without oil; you can’t put food into billions of stomachs without fertilizer; you can’t make microchips without helium.
Guess what? All these commodities pass through the Strait of Hormuz in vast quantities – or used to. Hormuz, the Persian Gulf’s gateway to the Indian Ocean and to world markets, remains largely closed, and the shortages will soon become apparent. But current prices, such as the relatively benign oil futures, still don’t reflect the probable economic pain to come.
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Consumers and investors, at least those in the Western world, seem convinced the worst is over. Take oil. In normal times, 20 per cent of the world’s oil (and liquefied natural gas) passes through Hormuz. “Normal” ended on Feb. 28, when the United States and Israel attacked Iran and assassinated its supreme leader, Ali Khamenei.
Yes, oil shot up. At one point, Brent crude, the international benchmark, went north of US$125 a barrel. Since then, it’s dipped below US$100 several times. In the past couple of weeks, it has been trading at US$105, give or take a few bucks, depending on reports of progress in a U.S.-Iran peace deal, sightings of oil tankers making it though Hormuz and President Donald Trump’s threats to vaporize Iran – or lack thereof in each case.
On Friday, Brent was climbing again, though it did not soar. Mr. Trump had renewed his threats to use violence to reopen the strait “or we’re going to do some things that are a little bit nasty,” and Iranian President Masoud Pezeshkian said “we will never back down” in talks.
The U.S. and Israel want Iran to end its nuclear enrichment program, hand over its stockpiles of enriched uranium, reopen the strait, and not charge tolls to ships passing through the trade chokepoint. Iran wants a permanent ceasefire, the ability to charge tolls, the end of the U.S. blockade on Iranian ports and a lasting ceasefire in Lebanon, where Israel and Iran-backed Hezbollah are at war.
The stalemate may continue for months, meaning higher prices for oil and other commodities are likely. Oil prices are still well short of truly ugly levels, in spite of International Energy Agency executive director Fatih Birol calling Hormuz “the largest energy crisis in history.” In 2008, just before the global banking meltdown, oil peaked at US$147. Adjusted for U.S. inflation, that’s about US$225 at today’s prices.
The closed strait, with no sign that it will reopen imminently, is not the only problem. Several other factors are conspiring to keep commodity prices up – and probably send them higher – along with inflation rates, which are climbing everywhere.
The biggie is stockpiles, which, so far, have provided a supply cushion. But that cushion is wearing thin. Global stockpiles of oil were falling by 8.7-million barrels a day – a record pace – in May, according to a Goldman Sachs report published this week. With oil exports through Hormuz running at only about 5 per cent of pre-war levels, those stockpiles cannot be replenished.
The U.S. Strategic Petroleum Reserve is also being drawn down fast. American refineries that are taking the oil favour the production of aviation fuel over gasoline, because the price of the former has soared, and so have their profit margins. No wonder gasoline and diesel prices in the U.S. have climbed so much. According to the AAA Fuel Prices monitor, the average price of regular gasoline is up by 43 per cent in the last year, to US$4.55 a gallon, with almost all of the increase coming since early March. Diesel is up by more than US$2.
Fertilizer inventories are also falling and won’t be replenished anytime soon, driving up prices and the cost of growing crops. About one third of the world’s nitrogen- and phosphate-based fertilizers come from the Persian Gulf countries.
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The other factor that will prevent a drop in commodity prices, particularly oil and LNG, anytime soon is the damage inflicted by Iranian drone and missile attacks on at least half a dozen big refineries in the Gulf. They are partly or entirely closed and will take months or years to repair. Industry monitor IIR said the Iran war had shut down as much as 3.5-million barrels a day of refining capacity as of May 7.
Add it all up – the closed strait, the vanishing stockpiles and the damaged refineries – and you have the perfect scenario for a commodities crisis that won’t disappear quickly even if the U.S.-Iran ceasefire holds.
If it doesn’t, all bets are off. If the U.S. and Israeli bombing starts again, Iran would no doubt retaliate by sinking ships, placing more mines in the strait and attacking more Gulf-area refineries.
That scenario is entirely possible even if Mr. Trump knows that high fuel costs are vote killers. So far, he doesn’t seem to care.