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Mounting miscalculations and a retreat to narrow self-interest by major countries, including the United States and China, are threatening to turn the current conflict in Iran into a global crisis for the supply of refined oil products. Much of the media focus tends to be on the price of crude oil, with benchmark Brent crude futures jumping as much as 20% to $111.04 a barrel, the highest since July 2022, in early Asian trade on Monday.
But while the leap in crude is dramatic, of more concern is the even bigger surge in the cost of refined fuels such as gasoline, diesel and jet fuel, which are the products that consumers actually buy.
The explosive climb in refined product prices last week was led by jet fuel, with Singapore spot prices hitting a record high of $225.44 a barrel on March 4, before easing to end the week at $155.82.
However, that price is still 66.7% higher than the $93.45 a barrel that prevailed on February 27, the day prior to the United States and Israel launched an aerial campaign against Iran.
Singapore gasoil, the building block for diesel and jet fuel, reached $123.39 a barrel on March 4, the highest since September 2023 and up 33.5% from the close on February 27.
In effect, product markets in Asia are starting to price in a shortage of supply of the key fuels that keep economies running.
The effective closure of the Strait of Hormuz is cutting some 18 million barrels per day (bpd) of crude and products, roughly split into 14 million bpd of crude and 3 million bpd of products, according to three-month moving average data compiled by commodity analysts Kpler.
While the administration of U.S. President Donald Trump claims the Strait remains open and has offered to insure vessels transiting the narrow waterway between the gulfs of Persia and Oman, the market has yet to be convinced that Iran won’t attack any ship attempting passage.
It is the closure of the Strait of Hormuz that is the most important strategic error made by the Trump administration and Israel in their attack on Iran.29dk2902l
In common with the majority of analysts and presumably Gulf governments the assumption was that this conflict would follow the same template as previous flare-ups in the region.
The assumption was that everybody would behave rationally and not target oil production and transportation infrastructure, as it is in nobody’s interest to halt the flow of crude and products.
But it turns out if you tell a dictatorial religious government that your aim is regime change, then that government feels little compunction to play by the prior rules.
Iran’s decision to target its Gulf neighbours that host U.S. military bases has upended all previous calculations about the conflict.
Gulf countries Saudi Arabia, the United Arab Emirates, Qatar, Kuwait and Iraq are highly dependent on their oil, fuel and liquefied natural gas exports, and right now their revenue is severely curtailed.
Dubai, one of the Emirates, is also increasingly dependent on its status as the region’s financial and tourism hub, with both sectors now taking a massive hit from the ongoing conflict.
MISCALCULATIONS MULTIPLY
The compounding errors of the Trump administration are now becoming more apparent.
It’s clear that they did not expect the Strait of Hormuz to be effectively closed, and their stop-gap solution hasn’t won market backing.
It’s one thing to offer insurance and perhaps naval escorts, it’s entirely another to ensure safe passage can happen for hundreds of vessels each week.
All Iran has to do is hit one fully laden crude tanker with a ballistic missile and all bets will be off, with the situation then likely to be worse than it is currently.
The next U.S. step of offering a waiver to India to resume purchases of Russian crude is a bit like feeding cookies to an elephant, it’s nice but largely ineffective.
What is already happening is that Asia’s refiners are scrambling to source crude from other suppliers outside the Strait of Hormuz choke point.
What is the likely result of this?
Crude oil prices will rise, and the longer the close of the Strait continues the more short of crude, and thus refined products, the region will become.
The response to this looming shortage is that countries with refining capacity will focus on their domestic needs and cut exports of fuels, thereby exacerbating the shortage of refined products. This can be seen by reports that China has ordered its major state-owned refiners to stop exports of refined products.
Some Indian refiners are also reported to be ending exports of fuels, while plants in some countries, such as South Korea, are cutting refinery processing.
The obvious question for the authorities in Beijing is how long before the decision not to supply refined fuels to importing nations blows back on the Chinese economy.
It is another example of a miscalculation that will prove more costly than the alternative of actually ramping up fuel exports to help meet demand.
China isn’t a major exporter of refined products, with about 600,000 barrels per day.
But it is the only major producer with significant spare capacity and a massive crude oil stockpile, estimated at over 1 billion barrels.
This level of inventories means China could continue to refine oil at its current rate for about three years, even if its imports dropped to zero.
In effect, China could use its huge stockpile to boost refinery runs, lift exports and ease the looming supply crisis.
This would not only be highly profitable but would also win favour with importing nations, who may otherwise run short of fuels.
Australia is Asia’s biggest fuel importer, taking about 900,000 bpd, according to Kpler.
Imagine a situation when the country could no longer meet this demand, resulting in shortages.
The government would have to prioritise food production and delivery, and keeping as much of the economy going as possible.
But a brave Australian government could say to China that no more iron ore would be shipped because of diesel shortages unless Beijing supplied refined fuels.
China gets about two-thirds of its iron ore imports from Australia and without these flows its steel industry would be severely curtailed, which in turn would devastate manufacturing and construction.
Getting to this point would only happen if the Strait of Hormuz remains largely closed and countries follow narrow and short-term self-interest.
The problem is that political leaders so far seem unable to grasp the extent of the stress they are putting on the energy supply system, and their actions suggest they see only their own country’s needs without realising that it is a global system that needs global solutions.
The views expressed here are those of the author, a columnist for Reuters.
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