The trouble with a one-page Memorandum of Understanding is that brevity leaves a great deal unsaid. Clearly there was a yawning chasm between how America interpreted the MOU and what Iran believed had been agreed. Or maybe , as JD Vance intimated, America never intended to keep its side of the bargain; it was just a way to buy some time.
In any case, after 28-days, the ‘ceasefire’ based on the US-Iran Memorandum of Understanding is now well and truly over. War in the Middle East is getting hotter with each passing day.
The first thing that should be noted is that oil flows out of the Strait of Hormuz during the ‘ceasefire’ averaged less than half what was passing through the Strait prior to February 28th. So, however many days away the world was away from going off an “energy cliff” before the MOU was signed, we are now at least two weeks closer to that bleak outcome.
I think we can assume that Iran and the US will again stop almost all traffic passing through the Strait in the days ahead.
Massive releases of global oil reserves have greatly reduced the impact of the closure of the Strait until now. At some point those reserves will run out. Oil market prices have remained surprisingly low throughout the crisis. Diesel prices, on the other hand, have shot way up - up to the point they would normally be if oil cost $140 a barrel. So, perhaps low paper oil prices have lulled us into a false sense of security.
I suspect, if the Strait is closed for another six weeks, that will on its own be enough to cause a severe global recession.
That said, a number of factors could bring us to that endpoint sooner.
Throughout the Hormuz crisis, the UAE has been able to export a couple of million barrels of oil a day through a pipeline to Fujairah port, which has reduced the effect of the Strait’s closure. Yesterday Iran struck two UAE tankers leaving Fujairah. If oil flows out of Fujairah are also halted, it will choke off global oil supplies even further.
The Houthis and the Saudis are now fighting. If the Houthis make a concerted effort to close the Bab El-Mandeb choke point, shutting off all Red Sea Traffic, Saudi oil exports through the Saudi pipeline become problematic. That’s another five million barrels of oil a day that will have difficulty getting out.
Ukraine has had some success damaging Russian oil facilities, with the result that Russia has now stopped exporting diesel and gasoline, and may soon reduce its oil exports. Given that, until now, increased exports from Russia had offset a good chunk of the losses from the Strait of Hormuz closure, stopping those exports will aggravate the effects of Hormuz closing again.
At this point, I have a hard time imagining Iran trusting the United States enough to sign any new agreement which would get the oil flowing again. I see no military way America can re-open the Strait. So the clock is running.
We have to hope that neither America nor Israel attacks Iranian oil infrastructure. If they do, it’s a given that Iran will damage refineries in all the Gulf States. Then the damage to the global economy would be an order of magnitude greater - and last for years.
P.S.: I have focused here on the kinetic risks. I could have written a whole separate post on the financial risks. What passes for prosperity in the United States today is built on the consumption of the richest ten percent of America, which is contingent on the AI and stock market bubbles continuing, the bond market remaining somewhat stable, and real estate prices not collapsing. None of those is guaranteed at the moment.
If we see contagion due to currency crises in Japan, South Korea, Turkey, or all three, the deleveraging that takes place could take a wrecking ball to the global financial architecture well before oil stocks hit zero.
O'Hara wrote:
That’s another five million barrels of oil a day that will have difficulty getting out.
/end
2 million barrel/day pipeline bypass for the Suez canal. Originally meant to be used if another shutdown of the canal occurred, these days used to partially/fully unload VLCC and ULCC ships to the point they can transit the canal (the canal authority is even offering discounts to encourage use of the canal by VLCC and ULCC ships). The real bottleneck is the number of shuttle tankers available to escort VLCC and ULCC ships. But if you add in redirecting Suezmax tankers you'd get pretty close to that 5 million barrels/day export.
So what is the problem. The oil is not meant for North Africa, Europe or the Americas, it is meant for Asia. This means sailing around Africa, and it looks like there aren't enough tankers available to take a route that doubles, triples if not quadruples the time spent sailing.
Excellent analysis Bruce! Thanks, stefan