The Strait of Hormuz Ship Show: Week 16 Update
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Summary
Takeaways
- ❖The US-Iran Memorandum of Understanding (MOU) to reopen the Strait of Hormuz quickly failed, with Iran reasserting control.
- ❖Iran's Persian Gulf Strait Authority (PGSA) now demands permits and mandatory (initially 'free') insurance for all vessels transiting the Strait, effectively acting as a protection racket.
- ❖Many international ships are turning off their AIS (Automatic Identification System) to transit the US-patrolled southern channel, indicating continued high risk.
- ❖US officials' claims of the Strait being 'open' and shipping returning to 'pre-war levels' are contradicted by actual vessel traffic and industry caution.
- ❖De-mining the Strait of Hormuz, particularly the central traffic separation scheme, is a long-term, complex process that could take weeks or even years.
- ❖Major shipping companies like Maersk are keeping Gulf restrictions in place due to high war risk premiums and operational uncertainty.
- ❖The US lifted sanctions on Iranian oil, allowing Iran to sell millions of barrels at higher prices, significantly boosting its revenue.
- ❖Qatar is successfully restarting LNG output and transiting the Strait, benefiting from some level of US protection.
- ❖The modern, internationally flagged and owned merchant marine is highly risk-averse, prioritizing commercial interests over national defense in conflict zones.
Insights
1Iran's 'Protection Racket' Re-Closes Hormuz
Despite a US-Iran MOU, Iran's Persian Gulf Strait Authority (PGSA) immediately issued requirements for all ships to obtain permits and mandatory insurance to sail through the entire Strait of Hormuz. This move, described as a 'protection racket' by the host, effectively re-closed the Strait for international shipping not complying with Iranian demands, which are sanctioned by the US.
The President of the United States announced no tolls for 60 days, but the Persian Gulf Strait Authority issued requirements for authority and insurance to sail through the entire Strait of Hormuz. (, , , , )
2Discrepancy in Strait Status and US Claims
While US officials, including the President and Secretary Wright, declared the Strait 'open' and claimed near 'pre-war levels' of shipping, actual MarineTraffic data and industry behavior (ships turning off AIS, Maersk maintaining restrictions) indicate a continued high-risk environment and significantly reduced traffic compared to pre-conflict levels.
Secretary Wright claimed 55 ships and almost 10 million barrels of oil were coming out, equating it to pre-war levels, but the host notes 138 ships were pre-war, and current levels are not the same. (, )
3Iran Profits from Lifted Sanctions
The US lifted sanctions on Iranian oil as part of the MOU, allowing Iran to immediately resume maximum capacity oil loadings from Kharg Island. This enables Iran to sell millions of barrels at higher, unsanctioned prices, generating significantly more revenue than pre-war.
The Trump administration immediately lifted Iranian oil sanctions under the new agreement, allowing Iranian ships to sail before the MOU was even signed. Iranian oil, previously sold cheap due to sanctions, can now be sold at higher prices, making Iran more money per barrel than pre-war. (, )
4Mine Risk and Long-Term Clearance Challenges
The presence of mines in the Strait, particularly in the central traffic separation scheme and near the southern channel, poses a significant long-term threat. De-mining is an arduous, multi-pass process that can take weeks or even years, as evidenced by mines from World War I still being found in the Baltic Sea.
The northern Iranian channels are believed to be mined. A mine was sighted about a mile off the southern channel, and mines are indicated in the central traffic separation scheme. De-mining takes a long time, requiring multiple passes, and mines from World War I are still found in the Baltic. (, )
5Risk Aversion of the Modern Merchant Marine
The modern merchant marine, largely composed of internationally flagged ships (Panama, Liberia, Marshall Islands) owned by offshore corporations, is highly risk-averse. Unlike national merchant marines of past wars, these entities prioritize commercial interests and financial viability over national allegiances, leading them to avoid high-risk zones like Hormuz despite official 'reopening' announcements.
The host questions why merchant ships are so risk-averse, explaining that modern ships are registered in open registries (Panama, Liberia, Marshall Islands) and owned by international/offshore corporations, lacking national ties or defense obligations. (, )
Bottom Line
Russia's LNG ambitions were negatively impacted by the (brief) reopening of the Strait of Hormuz, as they had hoped for a prolonged closure to boost their own LNG production and shift sales from Europe to Asia.
Geopolitical conflicts in key shipping lanes create ripple effects that can unexpectedly benefit or harm competing energy producers, highlighting the interconnectedness of global energy markets and maritime security.
Nations or companies with alternative energy sources or diversified shipping routes can gain significant market share during chokepoint disruptions, as seen with Qatar's LNG and Russia's aspirations.
China's aluminum supply was less impacted by the Hormuz crisis due to its use of 'dark fleet' bulkers transiting the Iranian channel and its strategic stockpiling, allowing it to profit by selling aluminum on the open market.
Strategic stockpiling of key commodities and the use of less transparent shipping methods (dark fleets) can provide significant economic resilience and leverage during international crises, potentially altering global commodity markets.
Companies and nations that invest in diversified supply chains, alternative shipping methods, or strategic reserves for critical materials can mitigate risks and capitalize on market disruptions caused by geopolitical events.
Key Concepts
Protection Racket
The host frames Iran's new system of mandatory permits and insurance through the sanctioned Persian Gulf Strait Authority as a 'protection racket,' where a powerful entity extracts fees or services under the guise of providing protection or access, reminiscent of organized crime tactics.
Mowing the Lawn (Mine Clearance)
The process of de-mining is compared to 'mowing the lawn,' emphasizing that it requires multiple, thorough passes over an area to clear it effectively, and even then, some mines may remain for decades, highlighting the long-term danger of naval mines.
Lessons
- Shipping companies must conduct thorough risk assessments, as official 'all clear' announcements regarding conflict zones may not reflect the complex reality of local controls and persistent threats.
- Governments and international bodies need to address the challenge of sanctioned entities imposing de facto tolls and controls on international waterways, which undermines global trade norms.
- Businesses reliant on commodities from the Persian Gulf should factor in prolonged high war risk premiums, potential transit delays, and the need for alternative supply chain strategies, even after 'deals' are announced.
Quotes
"I mean, we we were here a week ago. And we were talking about whether the strait was going to open, and I said yada yada yada, that this is probably not going to happen. Well, you know, we got a deal, I came out with a video, we updated that, we had this memorandum of understanding, and it looked like everything was heading right to where we thought it was. Then the Persian Gulf Strait Authority issued their requirements that you had to get authority from them to sail through the strait, it doesn't matter where in the strait, because they assert authority over the entire Strait of Hormuz, and then they require you to get insurance. That's right. They became a protection racket."
"If you're Maersk Lines, are you going to bring a billion-dollar ship through the Strait of Hormuz? No, you're not. You just You're just not going to do that because it's too expensive to do it. Even if you're running a 1% war risk insurance on a billion dollars, that's $10 million you're going to pay."
"I'm not trying to tell the United States how to do their business. But if there is supposed to be a reciprocal agreement here whereby both sides are moving ships around, if the Iranians renege on this, why is there not a US destroyer alongside every one of those Iranian tankers sailing through the Indian Ocean? And you know, kind of nudge up alongside and say, 'Hey, remember that deal? How about you tell your bosses back in Iran to, you know, get that deal open or else, you know, something may happen. We're out here in the middle of the Indian Ocean. Accidents happen.'"
Q&A
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