Iran and the Strait of Hormuz

California Economist David Zetland now living in Amsterdam giving us his perspective from Europe about the Strait of Hormuz. As usual, it reads a bit different than what we are hearing in the United States. I would expect such from someone based in Europe.

War, oil, trade and profiteering – The one-handed economist

America’s “Stable Genius” decided that he could “do a Maduro” on Iran. His advisers were too stupid to see the risks. (Remember that Trump doesn’t like competence — he wants everyone to be as mendacious as he is — so he hires people he sees on TV.)

Israel played a role here — Netanyahu told Trump he was a military genius so — sure — attack a country of 90 million people that’s survived 45 years of sanctions.

What could go wrong? Read this entertaining, yet scary summary from a few days ago and then come back. (Here’s a more recent update. Also cringe.)

Let me count the ways…

(1) Infrastructure

Trump et al. keep thinking they’ve eliminated Iran’s missile/drone offense. They forgot to check in with the “new normal” of the technology, which allows countries (or just folks) to build cheap and dangerous weapons. Iran has been doing this for years.

So Iran started “bombing” (I’ll use this verb in general for attacks at a distance) neighboring Gulf States, to inflict pain. (I wrote some fiction on attacking Saudi desalination in 2022.) If Iran takes out electricity stations, grids, and transformers, then the Gulf will be kinda uninhabitable for the people unused to A/C. If desalination goes out, then we’re looking at mass exodus.

2) Hormuz

ran is on one side of the Strait of Hormuz. I visited the other side (Oman’s bit that pokes into the Strait) in 2014, and it looks like this:

Note the altitude of the mountains… which can hide missile launchers.

Iran has decided to turn the Strait into a tollway, with the threat of sinking ships that do not pay the toll of $2 million/ship (listen). Maybe Trump will order the Marines to take over the Strait (or Iran?), but that’s gonna cost a lot of blood. If Iran gets the supersonic ship killers that China was planning to send (or already has), then Iran will not only be able to collect tolls, but also blow-up US Navy ships.

The current closure of the Strait has reduced global supply of gas, oil and fossil derivatives (plastics, fertilizer, etc.) by roughly 20 percent. (I’ll call those GOFD for short.) Prices have spiked. Governments are freaking out. Most governments are already heavily in debt, so they cannot support subsidies to “stabilize prices” at pre-war levels, so there will be riots, food shortages, etc.

More on those situations in a bit…

Insider trading

So far the only “winners” of Trump’s folly are (a) anyone who can supply GOFD while their competition is kneecapped and (b) Trump friends who are insider trading on his tweet-lies (“we are talking with Iran” or “we’re gonna end the war this weekend”). The timing of trades and his announcements have caught a lot of attention from the cui-bono crowd.

Coffeezilla is also on this. (Tbh, so are many many analysts. The grift is so transparent.)

Short-term guesses (0-3 months)

One interesting “winner” is Russia, which is definitely benefitting from Trump’s panicky “sanctions on, sanctions off” tweets in the face of market convulsions, but also — as an ally of Iran — giving military intelligence that can (and will) be used to kill US soldiers. Trump has always been a fool for Putin, but now he’s helping Putin pay for operations that are killing Americans? Reagan would be proud.

Ukraine is winning and losing in the current situation. It’s definitely losing with the cash flows going to Russia, but it’s winning with its ability to offer useful defensive weapons to the Gulf states, who are running out of America’s gold-plated weapons systems (as is America) and need cheap and cheerful.

Besides the GOFD winners, anyone or business with renewable energy is looking good. Gas and diesel users are losing (here’s my price tracker). The geo-political risks of oil have never been clearer. The increase of oil prices from $73/bbl before the war (Brent crude) to $100/bbl is equivalent to a carbon tax of $63/ton CO2, which is roughly where the EU-ETS has traded recently (I am appalled that some EU countries want to realx the EU ETS, to “help” manufacturers), except on all the world’s oil, 90% of which is barely taxed:

Long-term guesses (>3 months)

Besides the obvious TACO-trade where Trump gives up and Iran is left in charge of the Strait, I can predict a few obvious things:

• Gulf GOFD producers re-route their exports via pipelines, etc. Such actions will take years, so they may be forced to pay Iran for passage. They cannot hope to take Iran over without US support.
• GOFD prices will therefore stay high (say $80/bbl), which “destroy demand” but not really hurt anyone. Poor governments will be forced to let markets set prices. Some may fall to popular unrest, but their replacements cannot do any better.
• Marginal GOFD producers will start up operations (supply chain magic!) to pursue profits.
• Americans may punish Trump in the November elections (if they happen), but he will blame everyone but himself. US gasoline prices — already low by rich world standards — will fall due to US production, but inflation may not. Markets continue to protect Trump from his stupidity, even as his minion’s profit. The bad guys will not pay. The world’s poor will face greater food insecurity.

And so it goes…

[I wrote this on 25 March to go live on 30 March. If history is any guide, Trump will claim victory close to the weekend, to help his insider traders. he may also invade Iran with ground troops. I will comment below on anything interesting…]

H/T to PB for some data here and the inspiration to elaborate.

Addendum (6 Apr): Listen to Gary explain how governments are enriching the 1% while flailing to “protect” normal citizens. He’s right.