“If you have built castles in the air, your work need not be lost; that is where they should be. Now put the foundations under them.”
– Henry David Thoreau
The oil crisis of the last 100 days has underscored several global vulnerabilities. Energy prices flared, but strangely fell short of apprehensions. Hefty releases from the strategic petroleum reserves of International Energy Agency members, emerging South American supplies and re-routing of West Asian output through cross-country pipelines reined in prices to a considerable extent. For the first time, Shandong-based ‘teapot refineries’ bought Iranian light crude through shadow fleets at a premium to Brent crude.
Iran’s oil exports averaged 1.5 million barrels a day in March and April despite disruptions at the Strait of Hormuz. However, the US blockade shaved 80 percent off Iranian exports from May onwards. Iran used oil tankers as backup storage and part of the ‘floating’ inventory is presumed to have been trans-shipped to near Malaysian waters to provide a limited financial bail-out.
The oil market is highly prone to perceptions and predictions, as a portion of its trade is often shrouded in stealth. In a such a scenario, US President Donald Trump’s social media posts—oscillating between euphoric optimism and intimidation—confused the markets, and yet, succeeded in containing the situation.
Energy remains an important facet in America’s economic hegemony. For long, the US has nurtured dreams of establishing petro-protectorates. In a historical involvement, the US supported British and Soviet troops during the Second World War in 1941 to occupy Iran and avert a Nazi takeover of the region’s oil resources. Its Operation Iraqi Freedom in 2003 and Operation Odyssey Dawn in Libya in 2011 led to the decimation of the two petro-States.
US military engagement in oil-producing nations is not just about global energy security, but a pursuit of hydrocarbon dominance. Episodes such as the 1953 Iran coup, the takeover in Venezuela this January and the present Iran conflict reaffirm the pattern.
Riding on the crest of shale supremacy, Trump has visions of a great and powerful America, which in some ways is indisputable. But in the long run, external coercion will betray the economic rewards for the US.
Despite recent skirmishes, it’s hoped that the US-Iran memorandum of understanding would lead to lasting peace and not merely be a calling card for a fragile interlude. It is too early yet to predict a timeline for the revival of pre-war oil flows. A lot rests on the intent of the warring parties. While the MoU offers Trump an off-ramp to strategically exit from the misadventure, it could embolden external attempts to weaken the US’s political relevance in West Asia.
The suspension of sanctions on Iran’s oil exports—which now stands revoked—were expected to bring around 2 million barrels to the market per day. Though Iranian light crude remains a preferred grade for China’s private refineries because of its high yield of valuable distillates like jet fuel, their run rates at multi-year lows have limited demand. Chinese State refiners are seeking to revive buying Iran’s oil after a gap of almost seven years. However, the on-now-off-again sanctions waiver, convoluted payment modalities and continued EU restrictions have held most buyers at bay.
Iran’s breakeven oil price to balance its fiscal calculations is estimated at over $125 a barrel despite the low extraction cost of about $10. Forced to sell at a discount to market benchmarks because of the protracted sanctions and reliance on shadow fleets, the Islamic republic has constantly battled stunted growth and low welfare spending. Now, Tehran would do well to sensitise itself to maintaining a pliant relationship with the neighbouring States. They may be tacit investors for rebuilding Iran’s industry.
Most global energy giants hold equity stakes in exploration and production activities in the Persian Gulf. Sometimes, this comes in the form of a concession where international oil companies acquire a participating interest capped at a certain percentage. Such agreements typically run for more than three decades.
But the prospective $300-billion handshake to rebuild Iran could lay a pathway for American and European oil consortiums’ entry into Iran’s oil sector after a four-decade hiatus. The fact that the country has the world’s second largest natural gas reserves and third largest oil reserves offers a worthwhile incentive. Moreover, the first half of this year has witnessed all-time high investments by Gulf funds, at about $51 billion despite the war—half of which was directed to the US despite souring relations.
Hindrance to or assertion of concessionaire rights over Hormuz by either Iran or the US would be a folly in light of the established covenants. The UN Convention on the Law of the Sea’s articles 37-44, along with article 26, prohibit levying tolls for passage of foreign ships through natural international straits.
Setting a wrong precedent with a levy could affect global trade at other transit points, too. Given that a major portion of Iran’s oil passes through the Malacca Strait for East Asian and Chinese clients, Tehran should heed the ramifications as it could raise prices for regional buyers. Tolls at the Gibraltar Strait by Spain and Morocco would impact America’s shale transit to Southern Europe and other Mediterranean buyers.
The turmoil of the tariffs may have subsided, but the tribulation of tolls threatens to tarnish free trade forever.
At an energy meet at the Economic Club of New York on May 20, 2005, the then Federal Reserve Chair Alan Greenspan had said, “Because of the geographic concentration of proven reserves, much of the investment in crude oil productive capacity will need to be made in countries where foreign investment is prohibited, restricted, or faces considerable political risk.”
What better time than now for Tehran to initiate an image makeover? Well-calibrated diplomacy by the lead actors can resurrect an enduring partnership. Considering the episodes in Iraq and Libya as millstones, the US would do well to pursue a collaborative rather than a combative foreign policy while trying to revive peace.
Iran’s theocracy endured the war, but it may fail against the wrath brought on by an economic collapse. The US’s loss is likely to be much bigger. Although it will endure both the war and its economic headwind, its image of military might and leadership shall stand dented. It’s time the actors played the closing shot. The world is watching.
(Views are personal)