Juan Cole Informed Comment
Diesel prices are high in many markets around the world, but we ain’t seen nothin’ yet. Energy analyst Ron Bousso at Reuters warns that the Hormuz crisis has taken 9 million barrels a day of petroleum off the market, and it is only a matter of time before it causes a 1970s-style energy crisis that will elevate the price of gasoline, diesel and natural gas for years to come.
This week the news broke that the price spread (“crack”) between the price of a barrel of crude oil and the price refiners want to be paid to produce a refined barrel rose above $100. This statistic translates into a warning that gasoline and diesel prices will remain high for some time to come. That is bad news for Western economies. When you go to the grocery store, there is food to buy there because a truck running on diesel shipped it over. No diesel, no food. Or at least pricey diesel, expensive food. Trucks run on diesel, and some 70% of commodities shipped in the US are transported by truck. High diesel prices mean high everything prices.
A key problem is that the Strait of Hormuz is still closed for all practical purposes, and not many oil or LNG tankers are transiting it. Another problem is a reduction in refinery capacity. Bousso estimates that 20 percent of the refineries in the Gulf have been damaged by the Israeli-US war on Iran and Iran’s ripostes. Crude oil is just worthless sludge until it is refined into products such as gasoline and diesel. Loss of refining capacity equals loss of fuel.
This loss of 9 million barrels a day has been cushioned by the release of US, European and Chinese petroleum reserves, which have been run down to levels not seen for a quarter of a century. But obviously if the conflict in the Gulf continues for several more months, as it gives every evidence of doing, sooner or later the other shoe will drop, and consumers will be hit with very high prices and, worse, shortages.
The problems are complex, not simple, and compound one another. The Ukraine War has hit Russian diesel and gasoline refining, as Kyiv has deployed drones this summer to damage refineries. Some 7 of every 10 gasoline stations in Russia are closed and there are long lines at the ones still open. Russia has halted diesel exports, and may do so through the end of the year, badly hurting export markets such as India. But even if Russia did want to export oil and gas to Western Europe, US and European sanctions would prevent that step.
Likewise, the damage done to the Ras Laffan liquefied natural gas plant in Qatar by an Iranian counter-strike has taken 17% of Qatar’s LNG production offline, likely for 3-5 years. The Iranian blockade of the Strait has led to very few LNG tankers daring to try to go through the Strait. In Japan, which is heavily dependent on imported LNG, people will turn this winter instead to kerosene, which means a diversion of scarce petroleum to heating purposes. Also in Bangladesh, the lack of fossil gas has caused factories to switch to diesel, the use of which has risen almost 400% since the outbreak of the war on Iran. Since diesel is expensive, factory costs have increased. There are 10-hour-a-day electricity blackouts in Bangladesh and shops have to close at 8 pm.
One problem with the Trump administration’s plan to strangle Iran’s economy is that Tehran will not go quietly, and if things get too bad it will lash out again at its Arab Gulf neighbors, which export nearly 20% of world petroleum. Washington still has not gotten the message that Iran has taken global energy hostage and won’t hesitate to execute the hostages.
Bousso talked to the hardware guys, the ones in charge of refineries and shipping. They said a big market disruption is coming if Trump keeps the war on Iran going. The Wall Street analysts, they complained, don’t get it yet. But they will.
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