Wednesday, December 28, 2011

The Straight of Hormuz

Iran is threatening to close the Straight of Hormuz.

(I've mentioned this threat in previous posts...)

While I doubt that Iran has the ability to take on the U.S. Navy and effect a closure of the Straight for any length of time... you never know. The unintended consequences and unforeseen outcomes of a full fledged conflict with Iran, for that is what would come to pass at that point, are many and varied.

What would happen in the U.S. if Iran were successful in halting Oil shipments out of Iraq, Kuwait, Saudi Arabia, and Iran itself? Oil is a fungible commodity... it would matter little if most of the ME Oil ends up in Europe and Asia. The U.S. imports roughly 23% of the world's exported Oil. Oil exports would be cut by 25% or so... America would feel most or all of that cut... so let's say a little over 2 million barrels per day would come out of American supplies in short order (this is product and crude).

Of course the price of Oil, and hence gasoline, would be a moon shot... but the real problem would be availability - and physics. Without that Oil, a great deal less "work" would take place... with cascading effects across the economy, government, and society.

Police would have less gasoline to respond to 911 calls. Commuters would have less gas to commute. Markets would tumble. And yet, if temporary, such a short term crisis might be very, very helpful in prodding Americans, and our government, into taking action. After all, Oil imports, as we currently define them, will be gone in far less than a human lifetime... a closure in the Straight of Hormuz might give us some idea of what our future might be like and also give us some incentive, and our political leaders some cover, to get on with planning for life after Oil.

Because life will be very different. Yes, we will still have cars... having a car won't be the issue.... the issue will be the number of miles the average American travels by car, and that number is going to plummet (Here's a graph of Vehicle Miles Traveled ("VMT")... perhaps this process is underway right now). Think about that for a moment. In a nation of car commuting, what happens to the need for office and retail work space? It goes down like a rock in a pond, and with it the value of those properties (many of which are owned by the various pension funds... and those funds are already terribly underfunded) and the value of the mortgages held on these properties by the banks...

I could go on and on and on... but you get the idea. American's think nothing of getting in their car and burning $5 in gasoline in order to travel to purchase $1.50 worth of eggs. That will come to a screeching (no pun intended) halt. Now think about the impact on the auto industry... without that kind of wasteful driving how are we going to wear-out our cars so that we are forced to buy new ones? At some point we are going to figure out that we don't need a single additional car in order to burn all of the Oil we are ever going to have.... And what of the impact on retailers of the decline of traffic into their stores and the profits from impulse buying that will no longer be taking place due to an absence of impulse buyers?

And doesn't all of this contract the credit system (deflation of credit)? The Left bemoans how unfair wealth distribution is in the U.S. In this scenario that problem would evaporate... along with all of the tax revenues that currently support all of their favorite Social Programs.

Ah, but its a beautiful day. I have to go feed my livestock and milk the cow and head over to the academy to teach a grappling class. Enjoy your day!


Anonymous said...

From The Telegraph: some cheerful news in the midst of a morbid blogosphere

World power swings back to America
The American phoenix is slowly rising again. Within five years or so, the US will be well on its way to self-sufficiency in fuel and energy. Manufacturing will have closed the labour gap with China in a clutch of key industries. The current account might even be in surplus.

The making of computers, electrical equipment, machinery, autos and other goods may shift back to the US from China.
Assumptions that the Great Republic must inevitably spiral into economic and strategic decline - so like the chatter of the late 1980s, when Japan was in vogue - will seem wildly off the mark by then.
Telegraph readers already know about the "shale gas revolution" that has turned America into the world’s number one producer of natural gas, ahead of Russia.
Less known is that the technology of hydraulic fracturing - breaking rocks with jets of water - will also bring a quantum leap in shale oil supply, mostly from the Bakken fields in North Dakota, Eagle Ford in Texas, and other reserves across the Mid-West.
"The US was the single largest contributor to global oil supply growth last year, with a net 395,000 barrels per day (b/d)," said Francisco Blanch from Bank of America, comparing the Dakota fields to a new North Sea.
Total US shale output is "set to expand dramatically" as fresh sources come on stream, possibly reaching 5.5m b/d by mid-decade. This is a tenfold rise since 2009.
... California; Master Lock is returning to Milwaukee, and NCR is bringing back its ATM output to Georgia. NatLabs is coming home to Florida.
Boston Consulting expects up to 800,000 manufacturing jobs to return to the US by mid-decade, with a multiplier effect creating 3.2m in total. This would take some sting out of the Long Slump.
As Cleveland Fed chief Sandra Pianalto said last week, US manufacturing is "very competitive" at the current exchange rate...

Stephen B. said...

What I said over at Facebook:

One unfortunate side effect of Iran blocking the Straight is that the US, a nation finally realizing that it cannot afford to be a constant Middle East "peacekeeper" - a nation of people finally starting to get the idea that we should never have embarked on such a level of warmongering to begin with, would, after an Iranian blockade, start to churn out a whole new war and militarization of the region all over again out of desperation - to keep the oil flowing from those "Islamafacists." This all while tax collections at home plummet. If we didn't quite go broke before, another major war and prolonged military operation would quite possibly manage it in the end.

Additionally, to Anon., in response to that Telegraph article:

I don't think that fracking technology will save the US in regards to liquid oil the way it seems to have saved the US in terms of natural gas. Talking in general figures here because I don't have specific numbers in front of me, US domestic natural gas output, even before fracking, hadn't fallen nearly as much in terms of a percentage of peak US natural gas production. Also true pre-fracking, was that the US was still producing most of its own gas, while importing fairly little. All natural gas fracking has had to manage to do is keep US gas production constant more or less in order to keep US natural gas markets relatively quiescent.

As for oil on the other hand, in order for fracking to save the US, oil-wise, one would have to more than double US domestic oil production to even begin to eliminate US oil imports, and even then, given that oil is a very fungible commodity, we'd still be importing some. Frankly, I just don't see fracking doubling US oil production simply because most US oil fields such as those in Alaska or The Gulf of Mexico aren't of the type that would benefit from fracking in any large way, so while it's possible that Bakken formations would pour forth much more oil, and possibly forestall any further short term decreases in US oil production, that's a far cry from increasing US oil production to the point of doubling it, or more, especially since oil fields in other parts of the US, such as TGOM and Alaska, are already declining so much as they are.

Greg T. Jeffers said...

Dear Anon @ 6:05am:

Fracking won't work for Oil the way it does for gas... it is simple physics... flow rates of gas through those tiny fissures might be enough to sustain Nat Gas production... flow rates for Oil through those fissures WILL be economic far less frequently.

Please feel free to correct me by linking me to data.

Now, if Shale Oil production in the U.S. reaches 5.5 Million by 2015... up from about 550k today... well that's a game changer. I am willing to take the other side of that trade... in fact, if you believe that, you should go long American Real Estate and equities and short Treasuries immediately.

Greg T. Jeffers said...

And Anon:

Please register or use a nick name... we all like to know who we are talking to.

Greg T. Jeffers said...

The article goes on to say that American provides 72% of the oil it uses?


Not even remotely accurate.

Greg T. Jeffers said...

Although I DO think that the US$ is the best currency out of the big 7... for many of the reasons mentioned.

russell1200 said...

It is impossible to know with certainty, but Iran probably does have the capability to close the straights for an extended period of time.

They do not have a big military budget, but what they have has gone into surface to surface navamissileses, and naval mines. These mines include rocket assisted mines.

Modern navel mines lay on sea bottom (making sweeping difficult). The rocket assisted mines can lay in deeper water, being boosted up toward the surface when attacking a target.

In general an underwater explosion is much more damaging than the same size of air explosion.

Within the Persian Gulf they have a number of diesel and midget submarines. It will take some time to track these down. Tracking down submarines when being fired upon by shormissiles missles is not fun.
NavyU.S. Navey is of course very deadly, but is generally setup for fighting in the open ocean. They of course could sit outside the gulf, or base out of allied airfields, but that will make clearing the gulf much more difficult.

One positive note is that the Navy does have an anti-mine underwater drone. I doubt the Iranians can counter this other than to lay more mines than it can easily sweep.

Please recall that the Iranians do not need to stop the U.S. Navy, they need to maintain a plausible threat to the sitting duck tankers.

tweell said...

As a retired USN ET, I do not believe that Iran can close the Straits of Hormuz for any real length of time. Yes, our navy is a blue-water navy, but it's larger than ALL the other navies in the world combined, is more up to date and has a full munitions/spares stash, unlike the Army and Air Force. Depending on where the ships are, they might be able to close it for 2-3 weeks. Iran would pay a terrible price to do so.
Yeah, yeah, expect the sailor to cheer on his service. The Navy buys other countries gear so they can test it against their own. Anything that Iran has, we've seen and know how to deal with it. The only real question is: would Obama let them? How long would he dither before his advisors told him his re-election hung on the issue?
Iran tried to close the Strait in the late eighties. It didn't work out well for them. What would make it a better proposition this time?

Anonymous said...

When I first saw that fracking article my first thought was somebody has got something to offload. However even if fracking works out well we are not increasing known reserves, just recoverable reserves; so it doesn’t change the peak it just makes the decent slower. However fracking may not turn out well.

I was thinking about the earthquake problem and the danger may be worse than we realize. The North American continent is floating on the mantle with maximum force being exerted at the Rockies and the Appalachians. In between those two ranges, at the point of maximum stress, from North Dakota to Texas we are going to fracture all the rock in an attempt to extract oil?