I hasten to note that the United States is likely to experience rather less severe economic consequences from the Iran war than most other parts of the world. We produce much of our own raw material needs, and export a great deal to other nations. First World nations and those with large financial reserves will still be able to get much of what they need, but Third World countries that can't afford higher prices are likely to be outbid for the available supply. They're going to find themselves in a very difficult situation.
The problem is not just fuel, but also the raw materials made from (or using) fuel that are in turn used to manufacture the refined and/or manufactured products that the world wants to buy. In two recent articles, Jay Martin sums up some of the problems. First, he looks at fuel and related products.
The International Energy Agency has called [the closure of the Strait of Hormuz] the greatest global energy security threat in history.
The consequences are spreading like cracks in a windshield. Qatar’s Ras Laffan complex - the largest liquefied natural gas plant on Earth, responsible for supplying fuel to dozens of countries - has suffered extensive missile damage, knocking out 17% of Qatar’s LNG export capacity for up to five years.
Taiwan, which relies on LNG for 40% of its electricity, has an eleven-day emergency stockpile.
Australia has lowered its diesel quality standards and watched hundreds of petrol stations run dry.
Slovenia became the first EU state to introduce fuel rationing.
South Korea is enforcing a five-day vehicle rotation system.
Michael Haigh, the Global Head of Commodities Research at Société Générale - one of the largest banks in Europe - said last week that the final vessels carrying jet fuel to the UK were arriving, and that “there is no more after that.”
Let that sink in. No more jet fuel for the United Kingdom.
Dow Chemical - one of the world’s largest chemical companies, whose products end up in everything from food packaging to medical supplies - doubled its polyethylene price overnight.
Why does that matter?
Polyethylene is in your grocery bags, water bottles, food packaging, medical equipment, and much more. If you bought it at a store, there’s a good chance it touched polyethylene before it reached your hands.
Polyethylene is made from petroleum-based feedstocks, and when Hormuz closed, about 50% of the global polyethylene supply was affected.
They say that when the price of energy goes up, the price of everything goes up. You could say the same thing about polyethylene.
This is how a war in the Middle East shows up at your grocery store. Energy doesn’t stay in the energy sector. It flows through everything you buy, everything you eat, everything you build.
There's more at the link. He goes on to discuss financial aspects of the crisis.
Second, he shows how supply chain problems "cascade" from Hormuz to the rest of the world.
The Strait of Hormuz is a narrow stretch of water between Iran and Oman through which roughly a fifth of the world’s oil, a third of its seaborne natural gas, and the refined fuels, fertilizers, and industrial chemicals that power factories and farms on four continents flow every single day.
What [observers] might miss, is the cascade.
How a fuel tanker that can’t leave the Persian Gulf becomes a factory that can’t run in Korea.
How a factory that can’t run in Korea becomes a product that doesn’t land on a shelf in Seattle.
How your iPhone alone pulls materials and components from five different continents.
. . .
The modern economy is not a collection of countries. It is a single machine. Every country is a gear inside it. And the first gears to jam are usually not the ones people are watching.
In this case, everyone is watching oil.
No one is watching sulphur.
Most people have no reason to think about sulphur. It does not show up in presidential speeches. It does not trend on Twitter. Nobody builds an investment thesis around yellow rocks sitting in a port warehouse.
But sulphur is one of those boring industrial inputs that quietly hold the world together.
You do not need sulphur because it is rare. You need it because modern industry runs on it. Sulphur is used to make sulphuric acid, one of the most important industrial chemicals on earth. Think of sulphuric acid as the solvent, cleaner, and processing agent that helps turn raw materials into usable products.
Farmers use it to make fertilizer. Miners use it to separate metals from rock. Manufacturers use it in everything from batteries to chemicals to refined fuels.
Every economy needs sulphur and the industrial chemicals it helps create. And China manufactures roughly 45 percent of the world’s industrial chemical supply.
China imports much of the sulphur it needs from the Persian Gulf, turns it into the industrial chemicals used in mining, agriculture, and manufacturing, and then sells them to the rest of the world.
That means when the Strait of Hormuz is threatened or closed, China’s access to a raw material it needs to produce the chemicals that the rest of the world depends on becomes compromised.
And when a country runs short of a critical industrial input, it does not behave like a polite global supplier. It acts in self-interest.
First, it protects its own farmers, because fertilizer is food security.
Then it protects its own factories, because factories are employment, exports, tax revenue, and national power.
Then it protects its own strategic industries - batteries, electronics, defence, infrastructure, and energy.
Whatever is left can be sold to the rest of the world.
That is where the cascade begins:
The war in Iran disrupts shipping through the Strait of Hormuz.
China runs short on sulphur.
Chinese chemical production falls.
Foreign buyers are pushed to the back of the line, as Beijing has less to share with the global economy.
Mining companies in Africa, South America, and Southeast Asia lose access to the chemicals they need to produce metals. And then the price of everything that depends on those metals starts to rise.
. . .
Chile, the world’s largest copper producer...
Indonesia, the world’s largest nickel producer…
Peru, the third-largest copper producer…
Zambia, Africa’s second-largest copper producer…
Every one of them runs on Chinese chemicals - and every one of them is seeing orders slowed, cancelled, or repriced.
That is what “one nation’s shortage is everybody’s problem” looks like in practice.
A war in the Persian Gulf becomes a sulphur shortage in China. A sulphur shortage in China becomes a chemical shortage in the Congo. A chemical shortage in the Congo becomes a copper and cobalt shortage everywhere. And a metals shortage everywhere means higher prices for the battery in your phone, the copper wiring behind the drywall in your house, and the data centers running your favourite AI tool.
That is the cascade.
And we are barely into it.
Again, more at the link.
This is a very real issue. It will most certainly affect the USA, although, as I said earlier, possibly not so much as other countries. Some states will fare worse than others. To name just one example:
The arrival of the last oil tanker carrying crude from the Middle East to California this week has state lawmakers on edge, and an energy expert warning of a gas price “crisis” ... America’s war with Iran has closed off the Strait of Hormuz, and that tanker was the last to depart the region for California before war broke out. The state has no interstate gas pipelines and is heavily reliant on imports.
California will probably have no choice but to suspend its very restrictive fuel refining standards, because refineries in other states aren't set up to support them. Furthermore, it'll have to buy diesel, gasoline, aviation fuel and any other fuel it needs from anyone who has it, because it has too few refineries to process its own fuel needs. That fuel will have to be imported on tankers, because there are no interstate fuel pipelines to California: but with literally hundreds of oil tankers locked up in the Persian Gulf, unable or unwilling to transit the Strait of Hormuz, enough tankers may not be available. Even if they are, California will have to outbid other states (and foreign nations) who want US refinery output, which will lead to a concertina-like shortage in those states, who will in their turn outbid others, and so on, and so on. Thus, a California gas problem will rapidly become a US-wide gas problem. I'm pretty sure prices will go up significantly, and there may be shortages severe enough to require some form of (hopefully temporary) restriction on when, where and how much fuel one can buy.
That's just one example, from one state. Do your own reading in the financial and industrial media, and you'll find many more. Yet - we're probably living in the most fortunate nation in the world, in terms of our national ability to cope with an economic crisis of this magnitude. Spare a thought for those who are less fortunate, particularly the Third World nations that are unlikely to be able to afford enough fuel for their needs, enough fertilizer for their farmers, and even enough food to feed their people. If they buy food for their people, they won't have the fuel to distribute it. If they don't buy fertilizer, their crops for the next growing season will be drastically diminished - meaning they'll have to find even more money (that they don't have) to import more food (that they can't grow) . . . and so on, and so on, ad nauseam.
Even if the Iran war is resolved tomorrow, it'll take three to four months at a minimum - more likely six months or even longer - to refill the oil and feedstock supply lines and resume full-scale production. Don't expect any early relief from the stresses this will place on economies worldwide.
Peter
