Playing the Strait

The Mullahs and the Thugs of Iran believe that with threats and drones they hold the winning hand in the pricing of oil and gas. But relying on a Strait ultimately will be their downfall.

Not long ago, 20% of the world’s oil passed through the Strait of Hormuz on its way to Europe and the Far East. Iran’s calculation was that by threatening the tankers passing through the Strait they would intimidate the insurance writers in London and terrify the owners and crews on the boats.

The tactics have worked for the moment, but long term they have weakened the strategic value of Iran’s threats. To the surprise of most speculators on oil futures, the price of crude has neither shot up to $150 a barrel nor crippled the world economy. The private sector is awash in fossil fuels, solar has finally become competitive, and Tesla and the Chinese are selling electric vehicles everywhere.

Even more important, pipelines, ports, railways, politics, and an American blockade are making the Strait of Hormuz a soon-to-be 100-mile-long swimming hole.

Saudi Arabia has the biggest operating bypass, an overland pipeline currently capable of transporting 7 million barrels per day. It is positioning itself not only as the Gulf’s biggest oil producer but also as its principal overland energy corridor. Geopolitically that will make it virtually a world superpower.

If Iran wants to play tough, the Saudis have F-35 Jets and the money to hire pilots to fly them.

Iraq is potentially the 3rd largest exporter of oil. Its new leader was in Washington this past week. He also met with heads of American oil companies likely to restart major fields there.

The United States is the world’s biggest producer of oil and does not need any Strait to export it.

South America has now become a significant player in the world oil markets. Venezuela is being freed up to eventually become a major exporter again, joining Argentina, Brazil and now tiny Guyana, all with major oil-producing areas. Guyana alone is producing 1 million barrels a day and will be close to 2 million in three years, almost all exported.

Not to be forgotten is the huge Maple Leaf in the room, the Tar Sands of Alberta. If Canada wants to make the investment, it could become an oil exporter the equal of the Saudis.

There is one other possible loser in the oil export poker game—Qatar. Qatar is the largest exporter of liquefied natural gas in the world and the Strait of Hormuz is the only logical way of exporting its output for now. Qatar has some big cards to play. Its banks hold much of Iran’s money, and it gave President Trump a shiny new airplane, which his security people now fear is unsafe for him to use. Qatar badly needs a Strait.

My prediction is that without Hormuz and the threat of nuclear weapons, Iran’s regime will fall well before its 50th anniversary.

For the Mullahs and the Thugs, playing the Strait is a losing hand.

Question: How is your business dealing with the ups and downs of oil prices?