Two choke points

A second energy supply nightmare is upon us. Iran’s Parliament Speaker, Mohammad Baqer Ghalibaf has just delivered the starkest ultimatum of this war: 

“In a region where we do not sell oil, no one will sell oil. If our security is not ensured, no infrastructure will be safe. The security of the Strait lies in the absence of American forces.”

As if on signal, the Houthis, who are allied with Iran, closed the second choke point, the Bab el-Mandeb Strait on the Red Sea. The Houthis claim they have forced six ships to reroute. They also launched missile and drone strikes on two Saudi Arabian oil tankers (Encelia and Layla) in the Red Sea.

Bab el-Mandeb, at the southern tip of the Arabian Peninsula, connects the Red Sea to the Gulf of Arabia. The strait is now even more vital for Saudi oil exports because the disruption of the Strait of Hormuz has severely limited shipping out of the Persian Gulf.

According to the Associated Press (AP), three Houthi officials said last week that the group had been planning for months to disrupt shipping in the strait.

Those plans include the use of naval mines, explosive-laden boats, drones and helicopters to allow fighters to board ships, the officials said.

More than seven million barrels of petroleum a day transited Bab el-Mandeb in June, compared to around four million before the Iran war. Thailand, the Philippines (which sources 98 percent of its crude from the Middle East) and Vietnam will be severely affected.

I mentioned this possibility the last time but some said I was too pessimistic. They expected Trump and Iran to reach a peace agreement. Fat chance!

Our energy officials should have worked double time securing oil supplies from alternative sources. There is little evidence they have signed supply agreements with countries like Russia, the US, Canada, Mexico and others outside of the Middle East.

Memo to DOE: Stop telling us how many days of supply we have. This promises to be a long blockade. Tell us who you have signed supply contracts with. Or start emergency demand-reduction steps like rationing, shorter workweeks or work-from-home mandates, multiple days coding ban for cars or even closure of gasoline stations for part of the week.

International oil prices have surged sharply, with Brent crude breaking past the $100 per barrel threshold and West Texas Intermediate (WTI) jumping to nearly $92 a barrel in reaction to the Houthi blockade.

This means tankers loaded with Saudi oil bound for Asia must reroute around the Cape of Good Hope in South Africa. This adds roughly 30 days of extra sailing time, increasing fuel, freight and insurance costs.

Market analysts warn that if the dual blockades persist through the quarter, a global economic slowdown or recession is a distinct possibility.

A Reuters report published by The Hong Kong Standard cites Goldman Sachs analysis that predicts Brent might exceed $120 a barrel in the fourth quarter and average $100 next year if the Strait of Hormuz remains disrupted through 2027, with further upside if the Bab el-Mandeb strait and Suez Canal also suffer persistent disruption.

Goldman expects oil prices to remain high through July and August as global inventories decline fast due to lower Middle East production, high seasonal summer travel demand and a sharp slowdown in releases from strategic petroleum reserves.

Other energy strategists warn of worst-case scenarios pushing prices toward $150 if production infrastructure is damaged, forcing a prolonged halt.

Meanwhile, European diesel margins hit a record $66.25 a barrel on July 17, following Russia’s diesel export ban and further disruptions to Middle East supplies. Diesel traded as high as $65.30 a barrel last Thursday.

When this second major oil supply disruption starts to bite, the world can no longer depend on China to moderate the impact like it did the last time. Chinese refineries have reduced demand for oil imports by using their inventories.

These drawdowns came almost exclusively from commercial and corporate stockpiles. China’s primary state reserve of roughly 360 to 900 million barrels remains intentionally untouched.

China is expected to be reluctant to tap its Strategic Petroleum Reserve (SPR). Instead, it appears to be moving away from acting as a global price cushion for strategic reasons.

Beijing is preserving its core government SPR to ensure domestic energy security for a year or longer. It will not waste these state reserves merely to keep global prices below $100 per barrel for a war initiated by Washington.

Andy Xie, a Shanghai-based economist writing for the South China Morning Post said:

“Beijing needs to prepare for the worst-case scenario – lasting damage to Middle East oil production infrastructure. If the US becomes desperate enough to target Iran’s oil infrastructure, Tehran would respond by doing the same to Gulf producers. As much as one-fifth of the global oil supply could be taken offline for a decade or longer.

“China’s petroleum reserves wouldn’t be sufficient in such a scenario. But making the stockpile last would buy time for China to develop energy alternatives.”

US oil and gas production cannot fully mitigate the negative impact of the current twin straits closure because the sheer scale of the disruption, roughly 20 to 22 million barrels per day of oil and 25 percent of global liquefied natural gas far exceeds America’s available spare capacity.

Most political and security analysts are not predicting a clean end to the US-Iran war before the year ends, instead pointing toward a prolonged stalemate at best.

Whatever our energy officials or Malacañang says about currently having adequate inventories, we are clearly facing serious energy challenges. Some 98 percent of our oil needs are coming from the Middle East. A long-lasting choke stops Asian refineries from operating at capacity.

BBM should prepare for the worst, especially in the current political climate.

Boo Chanco’s email address is [email protected]. Follow him on X @boochanco