The question I have is that even if Trump wants to TACO, how much leverage do the Iranians have to extract humiliating concessions or even inflict political pain on Trump for the sake of it? What we're seeing here is that it doesn't take an old fashioned flotilla blockade to close Hormuz, just enough of a threat where shipping companies won't risk sailing through it because of a chance (even a low one, say 2% chance) that their tanker is hit badly. Insurance companies are not going to underwrite any policy until they sense the risk of transit is near zero.
Part of me wants to buy oil futures because I think the market is too stuck on the tariff TACO experience where Trump really did have unilateral control (and trading partners did not have much leverage), but here even though Iran is pretty spanked in a conventional military sense they can still go Hyper Houthi and lob Shaheds and other munitions for what's probably indefinitely and the US is left playing a very expensive game of whack a mole which still probably won't provide enough stability to return the strait to status quo ante.
The other thing that I find astonishing is there are clearly enough traders who think Trump’s word means something. It’s such a window into the question of “How did we get here?” to note there an astonishing number of people, including people in positions of power, who despite four decades of evidence otherwise think Trump is some sort of trustworthy individual.
He’s a walking, breathing advertisement against the free market idea that you don’t need regulations because the market will punish untrustworthy actors for you.
Over short time horizons, markets are a coordination game (Keynes’s beauty contest where you have to predict who everybody else thinks is the most beautiful), and “ceasefire noise” is a coordination mechanism for a “sell crude, buy treasuries, buy equities” trade that’s rational for market participants with short holding periods to participate in even if they privately think it’s bullshit.
There was a bit of a pent up rebound over the weekend after that bad week last week. Some folks grasped at straws. Iran was quiet for a day and then went back to doing what they were doing because nothing material happened.
I mean I think that's part of it. I'm aware too that the market includes many more "retail" investors than even 20-25 years ago which means these "retail" investors have an ability to affect markets more than ever. And I know that "buy the dip" has been an actual reasonable strategy for investing for awhile now.
This is a bit of jumble of thoughts here kind of only tangentially related to my original point so bear with me, but so much of the last 10 years and really the last 3 years has pushed me to the following: a) while I get there 10s of millions of voters, many of whom vote for Trump (or anyone) for very random reasons who don't deserve my scorn, there is a cadre of "elite" people who either voted for him, trust him or abet his policies that I have nothing but contempt for b) the "elite" people who have abetted Trump's actual crimes cannot be allowed to get away with it. I've increasingly become convinced that a lot of "how we got here" is downstream from lack of serious prosecution of Wall Street outside of the most obvious like Madoff. There needs to be hearings on stuff like Polymarket trade and yes jail time for those who committed insider trading and abetted illegal acts. I truly don't think we can afford a "sweep it under the rug" strategy of 2009 and especially 2021. So so so much of what you see in polling is really a disgust at "elite" impunity. Yes that takes the form of right wing voters angry at left wing elites, but I really do think it's just general anger at "elite" impunity. This has to be part of Democratic strategy and actual policy if they can regain power.
Shout out to What's Going on With Shipping? on Youtube to get a clear understanding of the on the ground of SoH. The indication is that even if you got peace today, the overall shipping would take over 20 weeks to unwind. As it goes on it will take more due the ships themselves running out of fuel, etc. So we are already at 4 plus months of serious pain worldwide.
The idea that you can easily get a negotiation between Iranian leadership, Israel and Mr. Erratic Single Level Thinker is unclear thinking. Iran wants US out of gulf. Israel wants Iran to quit looking for its destruction. Mr. Erratic Single Level Thinker can't make up his mind. I don't see a lot of possible paths.
Much of the current pricing of oil reflects the same lack of thought and enormous amounts of money looking for investment that is sloshing around. After all Walmart is at a P/E of 44 and there are huge investments in AI at the same time. So looking for reason that oil has gone up enough is simple, the supply of illogical thinking has not run out.
We cannot know the IRG’s capacity or will to sustain a prolonged closure of the straight. But provided they can, you have to think they could get a better deal in two months’ time than they could right now. I don’t see why they would give up while gas prices are still rising.
The problem that the IRG is living is that they have a populace (and many internal players) who are calling in airstrike against their leadership. While they can certainly toss missiles and drones outside their country, they can't protect themselves from their own populace. The sandwich they are in is just desserts for their relentless export of crap to others.
It's also confusing because we hear that Iran's missile capabilities have been "completely shut down", then we are asked for $200 billion more to fight the war because Iran is still lobbing missiles. We hear that we "wiped out Iran's navy and mine layers" yet Iran still holds a hold in mining the Straight. It's virtually impossible to put boots on the ground in Iran's protective mountainous terrain except for the area around Hormuz. Perhaps that's the plausable endgame ---to send in ground troops and carve out some territory around the pinch point(??).
The reason Matt put "deal" in quotes is the veneer on the "deal" can be very very thin. Some of the "deals" Trump got on trade were basically cut the tariff to a tenth of the announced value with additional carved outs for Canada to look for the real fentanyl dealers.
I'm long oil. Went longer after that Truth post. The question I have is what does Iran want this conflict to look like? They have almost no cards, but right now they get to determine when the SoH opens conditional on keeping domestic control and maintaining the ability to create kinetic effects in the SoH.
Maybe the US can affect one of these two conditions, but it'll take time and/or a lot more resources.
But what can Iran reasonably expect to get out of this? They aren't going to be compensated for all the destruction. US bases aren't going anywhere because they want it. What do they want for opening the Strait that Trump would be willing to give them? I don't know what that looks like.
Let's pencil this out. The Iranian regime's main priority is survival. Prolonging the war threatens their survival, but they also don't want to back down if it just means the US/Israel will turn around and attack them again a month later. So ideally they'd want some kind of security guarantee, although they probably wouldn't think they could trust Trump's word and rightfully so. So they'd likely demand something concrete that would make a renewed assault riskier or more painful for their enemies.
I've got it: Trump can give them nuclear weapons. That would solve the problem.
Iran could resort to playing the "fuck Donald Trump" game which would be a fun remix of the "fuck Jimmy Carter" game, which ended with the hostages being returned the day Reagan was inaugurated. Strait reopened the day next president inaugurated? Big if true.
"the US is left playing a very expensive game of whack a mole"
Only if we choose to. Now that we've got Venezuela on our side, we can just walk away from the Gulf, tossing a match over our shoulder as it bursts into flames, and call it "taking out the competition".
I don't think it's "cope" to realize the United States has bitten off more than it can chew with this war, and we need to get out now before going deeper in the hole (like Putin did with his failed Ukraine war). The rest is mostly salesmanship and spin.
Not all bets pay off, whether or not they were good bets ex ante.
Casey's right. The cope is the venezuela piece. Oil is a global commodity, Asian buyers will bid up the American oil and create large problems for Americans as well. There's no magic 20% of global production capacity sitting around to prevent large price shocks.
The ball's really in Iran's court conditional on it holding together its domestic political/security power and maintains the ability to create kinetic effects in the SoH. The only lever they have is this one. But it is a lever.
It is absolutely cope to think that "now that we've got Venezuela on our side we can just walk away from the Gulf, tossing a match over our shoulder as it bursts into flames, and call it 'taking out the competition'"
Right obviously by now I hope even Trump realizes that this has gone poorly. But that doesn't mean that TACOing now will restore the previous oil price.
Even if Iran agrees to let oil transit and we go back to a non-war state where Iran doesn’t seek to punish US actions we will still see a ~$20 a barrel risk premium. That risk price will stick for a while.
>...but here even though Iran is pretty spanked in a conventional military sense they can still go Hyper Houthi and lob Shaheds and other munitions for what's probably indefinitely...<
"Indefinitely" seems a bit strong. Presumably the Iranian government at some point is going to need to have an economy to preside over. Their staying power to continue fighting seems quite robust—probably a lot greater than President TACO's—but it's not infinite.
That's always been the threat. Notable that, until now, they *didnt* try to tariff the strait, even though their regime is desparate for hard currency.
I think its still too soon to tell. For one, they can't just lob drones forever because the US is detroying all their. launchers and factories, especially the most dangerous ones near the cost. Two, there does reach a point where governments will pay tankers to just take the risk and run the strait, as the did in the 80s tanker war.
The other short term adaptation that's available now to some people that wasn't in the past is remote work. Obviously this takes cooperation of the employer, but in a real crunch I suspect it would marginally increase elasticity compared to the seventies crises.
Correct. While a lot of employers have been trying to get employees back into offices (with mixed success) the fact that almost all went remote during the pandemic would make it hard for them to say no.
The far out superficial picture is quite funny. Trump reduces carbon emissions by increasing the prices of carbon and his left wing opponents are furious.
I understand why reaching for this dunk is fun for people, but the actual reality is a lot more complicated— Indian households are being forced to switch from using LPG for household cooking and hearing to much more high-emissions fuels; LNG being cut off forces large-scale gas to coal switching in India, China, and Europe, and the bombing of oil and gas infrastructure in the Persian Gulf significantly increases the likelihood of large methane leaks.
It's the same malignant reactive ping pong that's been going on with the two parties for over a decade. In regards to climate change it's become such a religious belief, like the arch right apocalypse adherents, that if the problem was solved tomorrow they would find a reason for it not to be.
When gas prices went up significantly in Biden’s term, I distinctly remember the stickers at gas stations with Biden saying “I did that.” I see on Amazon you can now get ones with Trump saying the same thing.
> refineries differ in the type of crude they’re set up to refine
Just for a little extra context - a lot of refineries run on chemical processes that are basically from the 1980s, or even earlier. But to the extent that the refinery industry has advanced in the last few decades, most of that effort has gone towards making refineries adaptable to handle different feedstocks and different demands for outputs. The oil companies understood that sinking a $10B investment into a refinery that is vulnerable to the whims of geopolitics and supply chain constraints is not a winning move. But obviously there are limits to how flexible you can be, so it's not like it's a panacea, just a useful band aid.
One big thing that I think hasn't happened yet is that there is normally a fleet of fully loaded tankers standing offshore as a kind of strategic reserve for China and other East Asian countries. Those tankers are now all being brought into port and when they are emptied then the shortage of Persian Gulf oil will really hit those countries and will push prices up. 'The hipster crudes cannot make up for the lack of Persian Gulf crude.
Also all of those tankers standing still in the Gulf....they need to move or they literally break down. Refrigeration of LNG stops working and we do not want that but other parts of the ships will start to fail as well. Eventually they will get to the point of not being able to sail when the Straight is reopened which will cause a crisis in the lack of tankers worldwide.
Economists reassure us that oil price shocks are temporary and may only impact 1-3 months worth of inflation prints. Yet the bottom 80% of households will have a much tougher time weathering $1/gal increases at the pump, and that's not to say anything about an increase in food prices. It's hard not to see economic contraction in the states even if Trump winds down operations in Iran by April. The American consumer is in deep credit card debt and overextended.
It's hard not to wonder if a lot of these knee jerk 'policies' from this administration are a sick way to rig the market and buy low, sell high.
$1/gal sounds like a lot for all the countries that aren't the richest country in world history.
So what're the political consequences in those 194 other countries? Are we looking at another wave of incumbents being tossed out and, what, right wing coming in?
A lot of European countries have gas prices over $10/gal already so $1/gal doesn't seem like such a big increase, and governments have something of an option to cut taxes to absorb the shock - though that creates revenue problems for a lot of countries which already have debt problems.
Another really important element to understand here is geographic spreads. Oil price benchmarks track the price of particular grades at particular locations, and the process of getting oil from point A to point B is nontrivial and sometimes can get sharply more difficult and expensive.
In grade and molecule composition terms, WTI and Brent are quite similar to each other, and under normal conditions, the spread between them is constrained by the possibility of arbitrage trades where physical commodity traders hire a tanker in one geography, fill it up, take it across the ocean, and collect the spread.
But the current disruption has enormously scrambled oil relative values all over the world, and most of the tanker fleet was initially in the wrong locations to take advantage of it. (Big ships are pretty slow and it takes weeks to move them from say, the Indian Ocean to the Atlantic). Consequently, the hire price for crude tankers has skyrocketed and even the tankers which *are* available take a while to get to where they need to go for arbitrage trades.
Eventually, WTI will be pulled towards other global crude benchmarks when a whole bunch of tankers arrive at our shores and start filling up. But that process will take a while; the current price surge is partly driven by declining product and heavy crude imports but also largely by stockpiling in anticipation of this arb trade.
I think Iran is now charging a toll for certain Chinese and Indian ships to safely transit through the straight. The exact details of the pay-to-pass transit option aren't understood, but ship trackers have detected ships with non-iranian cargos taking a detour from the main shipping channel to a nearby coastal island where it's believed they get inspected and cleared to transit.
Some commentators are saying this will likely become the status quo option for transiting the straight safely if the US just declares victory and leaves.
The "What's Going on With Shipping" Youtube channel has more details:
I think the Urals crude was already being sold, but at a discount to China and India. So removing the sanctions doesn’t increase supply, it just reduces market segmentation. That increases prices since other buyers can now bid for those cargos
I have no idea how it is resolved but an Iranian squeeze on oil prices to hit America hits China, Japan, India and Europe harder than it hits America. There is an international oil market so it is very hard to localise the oil price.
Yes, this is important. At some point, it will behoove those nations to send ships to open up the gulf, no matter how much they might personally dislike Trump. Some have already agreed to help, although they're vague on the details. Right now the US only has only 8 destroyers actively engaged in the operation, so it'll really help if allies can send extra ships.
Amazing to think that all these complex knock on effects flow from a single octogenarian being swayed by various self-interested parties into acting upon a whim.
China claims they have a strategic reserve of 1.4 billion barrels. I am not sure how they plan to use it or if there is any way to use it that doesn't lower the world price.
The question I have is that even if Trump wants to TACO, how much leverage do the Iranians have to extract humiliating concessions or even inflict political pain on Trump for the sake of it? What we're seeing here is that it doesn't take an old fashioned flotilla blockade to close Hormuz, just enough of a threat where shipping companies won't risk sailing through it because of a chance (even a low one, say 2% chance) that their tanker is hit badly. Insurance companies are not going to underwrite any policy until they sense the risk of transit is near zero.
Part of me wants to buy oil futures because I think the market is too stuck on the tariff TACO experience where Trump really did have unilateral control (and trading partners did not have much leverage), but here even though Iran is pretty spanked in a conventional military sense they can still go Hyper Houthi and lob Shaheds and other munitions for what's probably indefinitely and the US is left playing a very expensive game of whack a mole which still probably won't provide enough stability to return the strait to status quo ante.
The other thing that I find astonishing is there are clearly enough traders who think Trump’s word means something. It’s such a window into the question of “How did we get here?” to note there an astonishing number of people, including people in positions of power, who despite four decades of evidence otherwise think Trump is some sort of trustworthy individual.
He’s a walking, breathing advertisement against the free market idea that you don’t need regulations because the market will punish untrustworthy actors for you.
Over short time horizons, markets are a coordination game (Keynes’s beauty contest where you have to predict who everybody else thinks is the most beautiful), and “ceasefire noise” is a coordination mechanism for a “sell crude, buy treasuries, buy equities” trade that’s rational for market participants with short holding periods to participate in even if they privately think it’s bullshit.
There was a bit of a pent up rebound over the weekend after that bad week last week. Some folks grasped at straws. Iran was quiet for a day and then went back to doing what they were doing because nothing material happened.
I mean I think that's part of it. I'm aware too that the market includes many more "retail" investors than even 20-25 years ago which means these "retail" investors have an ability to affect markets more than ever. And I know that "buy the dip" has been an actual reasonable strategy for investing for awhile now.
But I still don't think that would be enough to move markets as much as they did yesterday. And this is just happened. https://www.nytimes.com/live/2026/03/24/world/iran-war-trump-oil
This is a bit of jumble of thoughts here kind of only tangentially related to my original point so bear with me, but so much of the last 10 years and really the last 3 years has pushed me to the following: a) while I get there 10s of millions of voters, many of whom vote for Trump (or anyone) for very random reasons who don't deserve my scorn, there is a cadre of "elite" people who either voted for him, trust him or abet his policies that I have nothing but contempt for b) the "elite" people who have abetted Trump's actual crimes cannot be allowed to get away with it. I've increasingly become convinced that a lot of "how we got here" is downstream from lack of serious prosecution of Wall Street outside of the most obvious like Madoff. There needs to be hearings on stuff like Polymarket trade and yes jail time for those who committed insider trading and abetted illegal acts. I truly don't think we can afford a "sweep it under the rug" strategy of 2009 and especially 2021. So so so much of what you see in polling is really a disgust at "elite" impunity. Yes that takes the form of right wing voters angry at left wing elites, but I really do think it's just general anger at "elite" impunity. This has to be part of Democratic strategy and actual policy if they can regain power.
Shout out to What's Going on With Shipping? on Youtube to get a clear understanding of the on the ground of SoH. The indication is that even if you got peace today, the overall shipping would take over 20 weeks to unwind. As it goes on it will take more due the ships themselves running out of fuel, etc. So we are already at 4 plus months of serious pain worldwide.
The idea that you can easily get a negotiation between Iranian leadership, Israel and Mr. Erratic Single Level Thinker is unclear thinking. Iran wants US out of gulf. Israel wants Iran to quit looking for its destruction. Mr. Erratic Single Level Thinker can't make up his mind. I don't see a lot of possible paths.
Much of the current pricing of oil reflects the same lack of thought and enormous amounts of money looking for investment that is sloshing around. After all Walmart is at a P/E of 44 and there are huge investments in AI at the same time. So looking for reason that oil has gone up enough is simple, the supply of illogical thinking has not run out.
We cannot know the IRG’s capacity or will to sustain a prolonged closure of the straight. But provided they can, you have to think they could get a better deal in two months’ time than they could right now. I don’t see why they would give up while gas prices are still rising.
The problem that the IRG is living is that they have a populace (and many internal players) who are calling in airstrike against their leadership. While they can certainly toss missiles and drones outside their country, they can't protect themselves from their own populace. The sandwich they are in is just desserts for their relentless export of crap to others.
It's also confusing because we hear that Iran's missile capabilities have been "completely shut down", then we are asked for $200 billion more to fight the war because Iran is still lobbing missiles. We hear that we "wiped out Iran's navy and mine layers" yet Iran still holds a hold in mining the Straight. It's virtually impossible to put boots on the ground in Iran's protective mountainous terrain except for the area around Hormuz. Perhaps that's the plausable endgame ---to send in ground troops and carve out some territory around the pinch point(??).
There is no objective. The Trump admin lives in a post truth reality. They cannot even articulate a goal much less accurately understand the world.
Higher gas prices also hurt Iranian allies like China. They risk isolation.
True for China, though Russia is also an ally and it’s got to be thrilled by the movement in oil prices and relief from sanctions.
I rather think Israel wants Iran to no longer be a significant threat or obstacle, which isn't really the same thing.
right, even if Trump blinks today he has already swatted the hornet's nest and the Iranian regime isn't just crawling back quietly.
As much as I'd dearly love to believe that, I see no reason to be so optimistic.
The reason Matt put "deal" in quotes is the veneer on the "deal" can be very very thin. Some of the "deals" Trump got on trade were basically cut the tariff to a tenth of the announced value with additional carved outs for Canada to look for the real fentanyl dealers.
Concepts of a deal
I'm long oil. Went longer after that Truth post. The question I have is what does Iran want this conflict to look like? They have almost no cards, but right now they get to determine when the SoH opens conditional on keeping domestic control and maintaining the ability to create kinetic effects in the SoH.
Maybe the US can affect one of these two conditions, but it'll take time and/or a lot more resources.
But what can Iran reasonably expect to get out of this? They aren't going to be compensated for all the destruction. US bases aren't going anywhere because they want it. What do they want for opening the Strait that Trump would be willing to give them? I don't know what that looks like.
Let's pencil this out. The Iranian regime's main priority is survival. Prolonging the war threatens their survival, but they also don't want to back down if it just means the US/Israel will turn around and attack them again a month later. So ideally they'd want some kind of security guarantee, although they probably wouldn't think they could trust Trump's word and rightfully so. So they'd likely demand something concrete that would make a renewed assault riskier or more painful for their enemies.
I've got it: Trump can give them nuclear weapons. That would solve the problem.
Iran could resort to playing the "fuck Donald Trump" game which would be a fun remix of the "fuck Jimmy Carter" game, which ended with the hostages being returned the day Reagan was inaugurated. Strait reopened the day next president inaugurated? Big if true.
"the US is left playing a very expensive game of whack a mole"
Only if we choose to. Now that we've got Venezuela on our side, we can just walk away from the Gulf, tossing a match over our shoulder as it bursts into flames, and call it "taking out the competition".
Delusional cope.
1 - Venezuela oil production badly needs investment to get back to production levels needed
2 - that investment must come from American oil companies
3 - zero American oil companies have jumped at the chance to invest in Venezualan extraction because they think the current arrangement is unstable
I don't think it's "cope" to realize the United States has bitten off more than it can chew with this war, and we need to get out now before going deeper in the hole (like Putin did with his failed Ukraine war). The rest is mostly salesmanship and spin.
Not all bets pay off, whether or not they were good bets ex ante.
Casey's right. The cope is the venezuela piece. Oil is a global commodity, Asian buyers will bid up the American oil and create large problems for Americans as well. There's no magic 20% of global production capacity sitting around to prevent large price shocks.
The ball's really in Iran's court conditional on it holding together its domestic political/security power and maintains the ability to create kinetic effects in the SoH. The only lever they have is this one. But it is a lever.
It is absolutely cope to think that "now that we've got Venezuela on our side we can just walk away from the Gulf, tossing a match over our shoulder as it bursts into flames, and call it 'taking out the competition'"
Right obviously by now I hope even Trump realizes that this has gone poorly. But that doesn't mean that TACOing now will restore the previous oil price.
Even if Iran agrees to let oil transit and we go back to a non-war state where Iran doesn’t seek to punish US actions we will still see a ~$20 a barrel risk premium. That risk price will stick for a while.
What price would oil have to get to make investments in restoring Venezuelan capacity pencil out?
>...but here even though Iran is pretty spanked in a conventional military sense they can still go Hyper Houthi and lob Shaheds and other munitions for what's probably indefinitely...<
"Indefinitely" seems a bit strong. Presumably the Iranian government at some point is going to need to have an economy to preside over. Their staying power to continue fighting seems quite robust—probably a lot greater than President TACO's—but it's not infinite.
That's always been the threat. Notable that, until now, they *didnt* try to tariff the strait, even though their regime is desparate for hard currency.
I think its still too soon to tell. For one, they can't just lob drones forever because the US is detroying all their. launchers and factories, especially the most dangerous ones near the cost. Two, there does reach a point where governments will pay tankers to just take the risk and run the strait, as the did in the 80s tanker war.
The other short term adaptation that's available now to some people that wasn't in the past is remote work. Obviously this takes cooperation of the employer, but in a real crunch I suspect it would marginally increase elasticity compared to the seventies crises.
Excellent point. Let's introduce Strait of Hormuz Fridays!
Correct. While a lot of employers have been trying to get employees back into offices (with mixed success) the fact that almost all went remote during the pandemic would make it hard for them to say no.
The RTO stuff is mostly about cutting staff without layoffs.
The far out superficial picture is quite funny. Trump reduces carbon emissions by increasing the prices of carbon and his left wing opponents are furious.
I joked at the start of this that Trump realized that the U.S. couldn’t tackle climate change domestically so he decided to enact a global carbon tax.
No democrat can beat trump’s keep it in the ground policy.
Biden had an America First keep it in the ground policy, cosmopolitan Trump managed to spread his policy across the world
I understand why reaching for this dunk is fun for people, but the actual reality is a lot more complicated— Indian households are being forced to switch from using LPG for household cooking and hearing to much more high-emissions fuels; LNG being cut off forces large-scale gas to coal switching in India, China, and Europe, and the bombing of oil and gas infrastructure in the Persian Gulf significantly increases the likelihood of large methane leaks.
The Thanos snap would also reduce world carbon emissions and gay marriage at the same time, but nobody would be happy about it.
Even Thanatos wasn’t really happy with what he did when you think about it….
Paul Ehrlich did just die but he still has plenty of fans.
It's the same malignant reactive ping pong that's been going on with the two parties for over a decade. In regards to climate change it's become such a religious belief, like the arch right apocalypse adherents, that if the problem was solved tomorrow they would find a reason for it not to be.
When gas prices went up significantly in Biden’s term, I distinctly remember the stickers at gas stations with Biden saying “I did that.” I see on Amazon you can now get ones with Trump saying the same thing.
It’s the picture of Trump staring and pointing at the eclipse
Maybe. You have to balance TACO with TOFU: Trump Operationally F____ Up.
or TAFO (Trumped Around, Found Out)
> refineries differ in the type of crude they’re set up to refine
Just for a little extra context - a lot of refineries run on chemical processes that are basically from the 1980s, or even earlier. But to the extent that the refinery industry has advanced in the last few decades, most of that effort has gone towards making refineries adaptable to handle different feedstocks and different demands for outputs. The oil companies understood that sinking a $10B investment into a refinery that is vulnerable to the whims of geopolitics and supply chain constraints is not a winning move. But obviously there are limits to how flexible you can be, so it's not like it's a panacea, just a useful band aid.
One big thing that I think hasn't happened yet is that there is normally a fleet of fully loaded tankers standing offshore as a kind of strategic reserve for China and other East Asian countries. Those tankers are now all being brought into port and when they are emptied then the shortage of Persian Gulf oil will really hit those countries and will push prices up. 'The hipster crudes cannot make up for the lack of Persian Gulf crude.
Also all of those tankers standing still in the Gulf....they need to move or they literally break down. Refrigeration of LNG stops working and we do not want that but other parts of the ships will start to fail as well. Eventually they will get to the point of not being able to sail when the Straight is reopened which will cause a crisis in the lack of tankers worldwide.
Economists reassure us that oil price shocks are temporary and may only impact 1-3 months worth of inflation prints. Yet the bottom 80% of households will have a much tougher time weathering $1/gal increases at the pump, and that's not to say anything about an increase in food prices. It's hard not to see economic contraction in the states even if Trump winds down operations in Iran by April. The American consumer is in deep credit card debt and overextended.
It's hard not to wonder if a lot of these knee jerk 'policies' from this administration are a sick way to rig the market and buy low, sell high.
$1/gal sounds like a lot for all the countries that aren't the richest country in world history.
So what're the political consequences in those 194 other countries? Are we looking at another wave of incumbents being tossed out and, what, right wing coming in?
$1/gallon sounds like a lot for even the richest country in world history
A lot of European countries have gas prices over $10/gal already so $1/gal doesn't seem like such a big increase, and governments have something of an option to cut taxes to absorb the shock - though that creates revenue problems for a lot of countries which already have debt problems.
The marginal cost of a price increases is higher at a high price than low one.
Another really important element to understand here is geographic spreads. Oil price benchmarks track the price of particular grades at particular locations, and the process of getting oil from point A to point B is nontrivial and sometimes can get sharply more difficult and expensive.
In grade and molecule composition terms, WTI and Brent are quite similar to each other, and under normal conditions, the spread between them is constrained by the possibility of arbitrage trades where physical commodity traders hire a tanker in one geography, fill it up, take it across the ocean, and collect the spread.
But the current disruption has enormously scrambled oil relative values all over the world, and most of the tanker fleet was initially in the wrong locations to take advantage of it. (Big ships are pretty slow and it takes weeks to move them from say, the Indian Ocean to the Atlantic). Consequently, the hire price for crude tankers has skyrocketed and even the tankers which *are* available take a while to get to where they need to go for arbitrage trades.
Eventually, WTI will be pulled towards other global crude benchmarks when a whole bunch of tankers arrive at our shores and start filling up. But that process will take a while; the current price surge is partly driven by declining product and heavy crude imports but also largely by stockpiling in anticipation of this arb trade.
Is Iran blocking Chinese ships from transporting oil and gas from the Gulf?
It feels like a really essential question for the oil price and shortages.
It's been widely reported they're letting Chinese-bound tankers tranist the strait (at least those filled with Iranian oil).
Saw a story about gas lines in China yesterday. There are a bunch of non fuel products that are affected by this.
Are they shooting or threatening to shoot at Iranian tankers which are transporting Kuwaiti oil?
I think Iran is now charging a toll for certain Chinese and Indian ships to safely transit through the straight. The exact details of the pay-to-pass transit option aren't understood, but ship trackers have detected ships with non-iranian cargos taking a detour from the main shipping channel to a nearby coastal island where it's believed they get inspected and cleared to transit.
Some commentators are saying this will likely become the status quo option for transiting the straight safely if the US just declares victory and leaves.
The "What's Going on With Shipping" Youtube channel has more details:
https://youtu.be/Eqr3s6uTays?t=306
Surprising factoid from the video: Iran is apparently on track to transit more oil through the straight in March than they did in February.
Wait, shouldn't lifting sanctions on Urals crude have caused overall oil prices to fall, by increasing supply for an otherwise-unchanged demand?
I think the Urals crude was already being sold, but at a discount to China and India. So removing the sanctions doesn’t increase supply, it just reduces market segmentation. That increases prices since other buyers can now bid for those cargos
It raises prices for Urals crude, but lowers prices for substitutes. The overall effect, holding demand constant, should be lower prices.
I have no idea how it is resolved but an Iranian squeeze on oil prices to hit America hits China, Japan, India and Europe harder than it hits America. There is an international oil market so it is very hard to localise the oil price.
Yes, this is important. At some point, it will behoove those nations to send ships to open up the gulf, no matter how much they might personally dislike Trump. Some have already agreed to help, although they're vague on the details. Right now the US only has only 8 destroyers actively engaged in the operation, so it'll really help if allies can send extra ships.
Nah, they’ll just pay the Iranians
Did Trump talk to the shah’s son and then claim he talked with Iranian officials?
Isn’t substitutabilities just substitutes?
Amazing to think that all these complex knock on effects flow from a single octogenarian being swayed by various self-interested parties into acting upon a whim.
Thanks Joe Biden.
Thanks Obama
China claims they have a strategic reserve of 1.4 billion barrels. I am not sure how they plan to use it or if there is any way to use it that doesn't lower the world price.