Yesterday we touched on the Iran war and how much of it has unfolded. Clearly an operational cover that was used was the TACO idea, that is, that Trump would chicken out and not follow through on the threats that were made. Iran thought that they could string the administration along and eventually Trump would be gone and Iran would have a nuclear weapon. That idea lies shattered within the ruins of the Ayatollah’s palace.
Another red line that exists no more is the idea that all oil facilities are “protected.” For a long time, there had been a “gentleman’s agreement” that all oil facilities were off limits in military conflicts in the Middle East. This was considered to be a “mutually assured destruction” scenario. Oil prices spike, stock markets plunge, and the attacking country gets blamed for wrecking the world’s economy.
Bombing the Tondgouyan refinery and storage depots has removed “all” from that equation. However, Iran’s export facilities are still intact. So, the ability to export oil is still intact when the flames of war die down. But the IRGC’s local refineries in Iran are now destroyed.
Keep in mind that the spike in oil prices is primarily caused by the closing of the Strait of Hormuz by Iran. As the coalition gains control over Iran, the blockage will be removed and prices will stabilize. Arabian oil will flow unimpeded once again. As this article is being written, we are already seeing a reduction in the price for a barrel of oil.
There are more geopolitical dots to connect here. China benefitted tremendously from the sanctions placed on oil from Iran, Russia and Venezuela. China was able to procure oil at steep discounts since much of the oil from these places had limited export possibilities. This created a buyer’s market for China. That is ending.
Venezuela oil is now being traded on the regular market and is being paid for in petrodollars. The benefits are accruing to the people of Venezuela. One of the three cheap sources for China has ended.
The Iran-China supply line is now severed. The Strait of Hormuz is effectively closed. Kharg Island, Iran’s principal export location, may be about to be seized. So, another cheap source for China is disappearing. Is this another “gentleman’s agreement” that is being ended? For a long time, China has been able to buy cheap rogue-state oil off Malaysia in broad daylight.
The third leg of the cheap oil stool is Russia. The US recently temporarily lifted sanctions on Russian oil to India. When Russia is able to command more for their oil, China is the country who stands to lose the most from recent US actions.
Jeff Childers notes:
Russia must sell cheaply because its buyer pool is limited— basically China and India, via the shadow fleet. Sanctions made China the customer of last resort, which gave Beijing enormous leverage to dictate bottom-barrel prices.
If Trump lifts sanctions, Russian crude returns to the open global market. Russia can sell to Europe, Japan, South Korea, India — anyone. Moscow no longer needs to give Beijing the friends-and-family discount. Market competition replaces monopsonistic dependency.
Who would have believed just a few short months ago that China would be forced to purchase all of its imported oil at market prices? Yet that is what appears to be happening. China’s three pillars of discount energy —Venezuela, Iran, Russia— all knocked out in the span of a few months. Is Trump just lucky?
BTW by temporarily lifting the sanctions on Russian oil, Trump has vaporized another “gentleman’s agreement.” That being Russia must always be punished. That was straight out of the Clinton playbook.
Interestingly Putin went on Russian TV recently and made overtures to Europe regarding entering into long-term energy contracts. Speaking Monday during a televised meeting with government officials and executives from Russia’s largest energy firms, including Gazprom, Rosneft, and Transneft, Putin said Russia remains prepared to resume large-scale oil and gas cooperation with European buyers under long-term agreements.
How does all of this affect the war in Ukraine?
More on that tomorrow.