By Joe Petrowski
Should things take a significant turn for the worse down the road, probably the most likely escalation of the US- Iranian conflict will involve the Strait of Hormuz. The Strait of Hormuz is the world’s tightest oil choke point. Some 35% of all seaborne crude trade passes through the strait and at 21 million barrels/day that represents 20% of the total world trade in petroleum.
The countries most affected by a closure would be Iraq, Saudi Arabia and the UAE. While all of these countries have built or added capacity to pipelines to bypass the strait, total unused capacity is just roughly 4 million barrels/day. Therefore, any major interruption would still impact 16 to 18 million barrels/day. Almost all of those exports go to Asia, but petroleum is still a globally priced market.
While it is impossible to predict the outcome of any interruption dependent on the extent of the disruption in severity and time and any escalation of the conflict involving production, refining and distribution facilities, we can say that given the historical elasticity of oil prices to supply we could expect a $7 to $10 rise in Brent and WTI. This would add 20 to 25 cents to the cost of gasoline and diesel. Although the US is relatively in a better position than most countries given our increased production from shale, other oil producing countries (primarily Russia, who just announced a joint naval exercise with Iran) would benefit from a global price increase.
How much of this fear is currently priced into the market is impossible to gauge, but the strength in global oil prices is due in part to these concerns and not simply roaring equity markets. The best we can hope for is a peaceful resolution of this conflict and continuing admiration for our domestic energy industry.
Joe Petrowski has had a long career in international commodity trading, energy and retail management and public policy development. He currently serves as the fuel director of Yesway convenience stores and an adviser to their Chairman on Operations and Merchandising, as well as a director of Xebec, a Canadian manufacturer of Clean technology and Green Print, a carbon mitigation firm. Petrowski previously served as the president and CEO of Gulf Oil LP and was elected to the Gulf Oil LP Board of Directors and then as CEO of the now combined Gulf Oil and Cumberland Farms. He is Managing Director of Mercantor Partners, a private equity firm investing in convenience and energy distribution.
