- Money Morning Australia

How Global Oil Supplies Could Fall 40% Overnight


Written on 16 January 2012 by Dr. Alex Cowie

How Global Oil Supplies Could Fall 40% Overnight

You’d never know it from the oil price, but the global seaborne oil supply might face a 40% cut. In the last few days the Brent Crude price has dropped from $115 to $110 a barrel, where it has spent much of the last three months.

So why could the global oil supply fall by 40% overnight?


Iran has threatened to block the Strait of Hormuz in response to US sanctions.

The Strait of Hormuz is the narrowest part of the Persian Gulf. Oil from producing countries like Saudi Arabia, Qatar, and the United Arab Emirates also ship their oil through the strait. All up, 40% of the oil produced around the world each day goes through this narrow channel.

The Strait of Hormuz – a weak point in global oil shipping
The Strait of Hormuz - a weak point in global oil shipping
Source: Googlemaps

 


So what sanctions would trigger Iran to block the Strait?

The US has asked the world to stop buying Iranian oil.

The US has lobbied China and Europe to buy their oil elsewhere. The US stopped buying Iranian oil years ago. China, Spain, Italy and Greece are still big buyers. Iran still makes up 5% of global production.

The US has put the pressure on Iran in this way to get Iran to give up its nuclear ambitions.

This reeks of hypocrisy. How can the US, which has the world’s largest store of nuclear weapons, tell other countries not to develop them? It is also inconsistent. The US let Israel develop its nuclear capacity with minimal interruption.

Iran is not happy being told what to do by a financially and morally bankrupt foreign power. And in response it threatens to close off the Strait, which would cause the oil price to soar.

The World’s Most Valuable Commodity

Oil has a long history of triggering conflicts. There is a great quote in the movie Blood Diamond that puts it well. A villager stands in front of his burning village, with dead bodies scattered everywhere, and says “…let’s hope they don’t find oil. Then we will have REAL problems.”

Because the Strait is an obvious flash point, the US has a strong military presence in the region. The US Navy has a fleet moored off the coast of Dubai. Right now, the US has positioned two aircraft carriers in the Strait, and a third is on its way. Of course, Iran has a powerful military of its own. And while Iraq had few friends, Iran has powerful allies in Russia and China. Conflict needn’t be naval either. Soldiers can launch powerful anti-ship missiles just as easily from small trucks hidden in nearby desert.

Is the US drawing the world back into war?

If you look to the calmly trading oil market for answers, it doesn’t seem likely. Oil prices have been falling, not rising.

And there are a few good reasons for this.

For one thing, the US can’t afford a conflict. Its last two conflicts have cost $1 trillion each. Obama has asked Congress to raise the US debt ceiling (again) by $1.2 trillion to $16.4 trillion. And that’s just to pay for the yawning gap between tax revenues and government expenses.

More importantly, the US knows conflict would lead to oil prices high enough to freeze economic growth in its tracks.

But Iran has rephrased its threat slightly over the weekend. Ahmad Valid, Iran’s defence minister, has back-pedaled and said Iran did not actually say “it will close the strait”.

Making sure everyone understands each other would be a good start.

The US has lobbied China and Europe to drop Iranian oil, but has not made much progress. China doesn’t seem interested. Europe has asked for six months to consider its options. Japan, South Korea and India have said they would only reduce their use. Sanctions are only partly in place.

So far it seems the US has stirred up Iran, without achieving anything.

Quite rightly, the countries that buy oil from Iran would like to know where they could get oil from instead. 5% of global supply is not easy to replace. Saudi Arabia, the world’s largest oil exporter, is confident it can bridge the shortfall. Ali Naomi, Saudi Arabia’s oil minister said, “Whatever customers want, we will give it to them.”

But it is widely believed that Saudi Arabia is already at peak production, and doesn’t have anywhere near the reserves it claims to have. So whether it can bridge the shortfall is to be seen.

Needless to say, this kind of talk has drawn Saudi Arabia into the fray. Iran has said, “Such moves are not considered friendly, and that the consequences…could not be predicted.”

The US would prefer to avoid conflict. But Iran could be unpredictable when backed into a corner. How this will pan out is impossible to say.

The Strategy Ahead

It does point to the increasing importance of sourcing energy from less volatile regions, preferably from your own doorstep. For example, the shale gas revolution in the US has given it an entirely new home-grown energy source. Shale gas projects in Australia are having some success as well.

Being self-sufficient will become more important as global tensions build over energy supplies. But it’s not just the Strait of Hormuz that we should focus on.

The South China Sea is a bit closer to home. And it could be a more important flash point. About 30% of the world’s seaborne oil is shipped through the 2 km wide Straits of Malacca (between Singapore and Sumatra), into the South China Sea.

China has been throwing its weight around much more in the last few years, claiming disputed territories and islands.

The US has recently stepped up its footprint in the area. It has promised to divert its military resources to police the region in the 21st century.

This military build-up in our backyard could have big implications for energy stocks in the future. And there will be some highly profitable investing opportunities on the back of it.

Dr. Alex Cowie
Editor, Diggers & Drillers

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24 Comments For This Post

  1. neil Says:

    “This reeks of hypocrisy. How can the US, which has the world’s largest store of nuclear weapons, tell other countries not to develop them? It is also inconsistent. The US let Israel develop its nuclear capacity with minimal interruption. ” NO it does NOT; I used to think so, but if the USA lets every tin pot dictator or religious nutter get NUCLEAR, then WW3 is around the corner – more power to Israel & the USA and by extension Australia for having the big ones to stop Iran. This is one place a level playing field & free market do not work. Hypocrisy smockrosy……….keep me, my family & the world safe from Iran’s world ending threats!

  2. Peter Fraser Says:

    I guess that nuclear proliferation is unavoidable in the long term, but letting an absolute nutter like Mahmoud Ahmadinejad gain control of a killing machine like that would be suicide for the free world. He tramples on his own people with shonky election counting, he denies the holocaust, he spreads bare faced lies about 911, and he is universally unloved even in the Arab states.

    The people of Iran deserve a progressive free government. If they ever get it then perhaps we could trust their government, but apart from energy needs why would they want nuclear power?

    In the not too distant future nations like Iran will have nothing to sell. Peak oil will destroy them. Why they are not making economic preparations for that event is a mystery to everybody.

  3. Mad Max Says:

    American propaganda at it’s best they what everyone to live in fear so they can run world. There has been no new proof of Iran having nuclear weapons.

    we have WORLD WAR III to look forward to.

  4. SV Says:

    Iran and Strait of Hormutz is an old story. The markets have factored in that risk already; they have become bored with this; they do not believe that either party has the guts.

    Maybe they are right, maybe wrong, but here we should focus on the possibilities that most investors ignore. I doubt this is one of them.

  5. Pete Says:

    This has more to do with the Iranian threat to end oil trading in USD than anything else

    IRAQ stopped trading in USD result Invasion
    Lybia stopped trading in USD result Invasion or military assistance

    The global treading in USD allows the US by extension to continue it’s deficits as all countries require large USD holding to purchase oil

    I am not defending Hussian, Ghadaffi or anyone here but lets get this clear it is about oil and the USD, nothing else matters

  6. Drood Says:

    PF…..” but apart from energy needs why would they want nuclear power?”

    I can’t believe you said that. They want it for precisely that reason and why shouldn’t they. As for developing a bomb, what would you do in their position? they are surrounded and constantly threatened by the US and Israel.

    If you think Iran is developing a Nuke to threaten anyone , then you are much dumber than you like to think you are.

    There is only one country that has ever used a nuke in anger, all other nuclear countries have not . Has Pakistan used it despite US incursions and will Russia use thier immense nuclear arsenal despite the hypocritical US refusing to pull missiles away from the Russian border. Do you remember the Cuban missile crisis?, because something similar seems to be what the yanks are hell bent on .

    There are many things Ahmeniwotsit is supposed to have said , nearly all of which were mistranslated by that paragon of virtue Fox news.

    Your remarks are childish and uninformed.

    There are many obnoxious governments around the world, look at your own governments treatment of its citizens, The Iranians may treat their citizens badly but i remember a certain country stealing children not too long ago. Maybe we should have nuked them.

  7. fbcat Says:

    PF wrote” … He tramples on his own people with shonky election counting, he denies the holocaust, he spreads bare faced lies about 911, and he is universally unloved even in the Arab states.

    The people of Iran deserve a progressive free government. If they ever get it then perhaps we could trust their government, … ”

    Hmm – except for the bit about “denies the holocaust” your could transpose that to apply to USA and its oligarchs.

  8. Pete Says:

    fbcat hats off

  9. Mad Max Says:

    fbcat,
    Iran had free government in 1953 the US went in and over throw the government and Installed a dictatorship becouse Iran at the time wanted 25% of oil payments.

  10. Peter Fraser Says:

    drood I don’t trust the guy. If I thought that Iran only wanted nuclear power for peaceful use then I would be OK, but I don’t believe that.

    We have enough fruitloops with atomic power, do we need any more? We only need one person to use that power and the ramifications will be extremely serious.

    If you, fbcat, and Pete think that Iran are a peaceful power who won’t use power incorrectly then you are very much misguided.

    Wait until the next generation in Iran take power, and then perhaps we can move onto the next level.

  11. fbcat Says:

    PF wrote: “… If you, fbcat, and Pete think that Iran are a peaceful power who won’t use power incorrectly then you are very much misguided. …”

    Again – can be transposed to apply to USA.

    I was more pointing out that USA can’t be trusted either. In my opinion USA are the worst of the lot. I’d much rather visit Iran than USA – except that I would be worried that while visiting Iran I’d get attacked by USA.

    I don’t think Iran is a peaceful power – but I respect their right to want to defend themselves. I don’t think the western world has the right to impose their “policing” on the middle east as though the western world is the “good guys” and everyone else is the “bad guys”. Why is USA allowed to have weapons of mass destruction and anyone else who tries to get them is evil and needs inspections.

    As Pete indicates, this has only become an issue now because Iran is or has stopped trading oil in USD. If enough oil producing countries start doing the same that is hugely dangerous to USA.

  12. neil Says:

    One thing you are all missing is that the USA & Israel WILL NOT let Iran get the nuclear bomb! Why? well when you are surrounded by 500 million Arabs that hate you, you work it out!

  13. Tim Says:

    Yeah, it’s easy to pick fault with the US, like it is with every country that has been in a position to dominate the entire world. But give me a zany Uncle Sam with a remnant of democracy over a rabid madman who has thinks a worldwide nuclear disaster is good for Islam.
    “Anybody who recognizes Israel will burn in the fire of the Islamic nation’s fury”.
    Sorry world. According to Ahmadinejad, the imminent reappearance of the 12th Imam needs a nice big fiery conclusion. That’s a lot worse than Hitler, Stalin or….Bush (if that’s how you like it).
    C’mon Doc, turn off the TV and call a spade a spade.

  14. SV Says:

    Drood – “If you think Iran is developing a Nuke to threaten anyone , then you are much dumber than you like to think you are.”

    Tell me then, what nobble goal does it develop the nukes for?
    No one, except US, can pose a credible threat to Iran. And US is out of reach for Iran’s missiles.

    Of course their allies, including Israel, Turkey and Saudi Arabia, are not. But then would not you say they are threatening these countries?

  15. Peter Fraser Says:

    fbcat – Iran and Russia moved away from $USD because they knew that the sanctions would come into play. They now HAVE to directly exchange currencies instead of using the $USD. Many currencies are not directly traded, they pass through $USD exchanges.

    The USA couldn’t care less about what currency that Iran and Russia trade in, they are not trying to maintain the exclusive position of $USD, they are trying to halt nuclear proliferation.

    I’m well aware that the USA is the only kid on the block who has used nuclear weapons in anger, but does that mean by extension that we should arm every kid on the block with an arsenal of nuclear weapons. Perhaps you should relate this back to street gangs and what happens when the local teenage toughie graduates to handguns instead of flick knives. Does it get better – no it gets worse.

    Would it be more peaceful if we were all armed to the teeth?

    You need to cease looking at the world through rose coloured “let’s be fair to everyone” glasses because nations like Iran who are led by wanna be dictators intent on warfare to achieve a political end don’t care about your “lets be fair” attitudes and after using you they will drive their APC right over the top of you.

    Rule number one in life – you don’t give irresponsible people the tools to exterminate you. If they want nuclear power for electricity generation only that’s fine, but it really doesn’t look that way to me.

  16. Peter Fraser Says:

    Mad Max – you only have to read Ahmadinejad’s quotes to understand that he harbours ill will against the western world and some of his neighbours.

    The fact that he constantly lies about the holocaust either makes him a liar or an idiot, and I trust neither of those options with nuclear bombs.

    Good people will rise up in Iran and overthrow his regime, but until then he can’t be trusted.

  17. Trading Coach Says:

    Because “politicking” has entered the picture, no matter who suffered, nothing seemed to matter anymore. It is about power.

  18. Pete Says:

    I have made no comment about IRAN’s pursuit of Nuclear arms, IMHO no country should have them.

    And as an ex professional soldier I would like to point out that the US has left tons of depleted uranium tank shells all over the Middle east, they have supplied Israel with fissile material, what makes a rabid Zionist any better than a rabid Muslim any better than a rabid Christian, they all believe that their god is the only god, when in fact it is the same fucking god they all worship

    I was just trying to make the point that the USA’s motives are not to be trusted, and Australia would do well to remember which bloody side of the world we are actually, physically located

  19. Pete Says:

    PF I was not attacking you either, I am under no illusion as to the purpose of the current governments plans viz nuc power

    I just wish the Yanks would be honest about their motives instead of dressing it up as doing the rest of the world a favour, where were the WMD’s in IRAQ, oh that’s right they did not have any!

  20. Peter Fraser Says:

    Pete – fair enough, your points are not lost on me. I was a staunch opponent of the war in Iraq, but I see that as another monumental George Bush stuff up rather than a USA stuff up. Perhaps I have confusion issues on that, but I knew that they couldn’t win the peace, they haven’t since 1946, and I think that those countries need a strong leader, who may act in ways that seem barbaric to us at times. Bring back Saddam I say.

    Truly I doubt that Iran has current nuclear capabilities, but they will get them soon enough.

    I agree with your views on the competing religions in that area. I’m not devout, but if I had to be I think that Buddism sounds good. That or alcoholism.

  21. Pete Says:

    I will drink to that mate

  22. Drood Says:

    PF ….Just when i thought you had finally lost the plot, you reveal that you are of the same religion as myself. i suppose i’d better drink to that.

  23. Peter Fraser Says:

    Hallelujah Brothers.

    May the farce be with you.

  24. Pete Says:

    Nice



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