Ambrose Evans-Pritchard
The Strait of Hormuz is still closed. The only vessels making it through are Iranian tankers or cargoes moving on Iran’s say-so and mostly headed for China and India.
Iran is still fighting its guerrilla war of attrition. We are still amid of the greatest global energy shock in history. The world is still missing 14 million barrels a day (b/d) of crude oil and refined products, and a fifth of its liquefied natural gas (LNG) supply.
Donald Trump’s waiver on sanctioned barrels of Iranian and Russian oil adds no significant volume. Most of the barrels in transit were already part of the normal global supply. The extra “storage on water” covers the global shortfall for another 24 hours at most.
The waivers are chiefly a windfall gain for our enemies. Russia has been selling its crude in Asia at a premium over Brent, earning a $US60 ($86) bonus over mid-February levels. Ditto for Iran’s Revolutionary Guards Corps.
Physical deliveries of Oman Murban oil or Dubai basket going to Asia are still commanding $US145, far higher than paper futures, and a taste of what may soon be coming to Europe as the last tankers arrive from Suez before the lock-gates close.
“We are aware of what is happening in the paper oil market, including the firms hired to influence oil futures. We also see the broader jawboning campaign,” Mohammad-Bagher Ghalibaf, the speaker of Iran’s parliament, posted on X.
“But let’s see if they can turn that into ‘actual fuel’ at the pump – or maybe even print gas molecules!”
The Gulf states are still having to “shut in” a tenth of global oil production because they have run out of storage. The structural damage is still rising in a non-linear fashion as each week passes.
It will take months for Iraq to revive its oil fields even if the war ends today. It will take Qatar three to five years to repair the world’s biggest LNG facility at Ras Laffan in Doha. The International Energy Agency (IEA) says 40 energy assets have been “severely or very severely damaged” across nine countries.
“Markets do what markets do,” said Chris Wright, the US energy secretary, adding that demand destruction and higher supply from US frackers and other drillers would take care of the problem.
Such glib insouciance confirms the worst fears of outraged Gulf leaders and may well lead to profound realignment in favour of China when the dust finally settles.
Whatever happens now, as Trump blusters and bullies his way through another week, China has already won the biggest prize of the Gulf War.
Xi sounds like the voice of calm responsibility as Trump squanders US diplomatic and strategic credibility at a breathtaking pace. He just has to sit tight as the NATO alliance disintegrates.
The West was on borrowed time when Trump threatened Canada, and then Greenland, and funded a propaganda agency to destabilise Europe’s democracies. It is all but dead after insults and threats of the last month, culminating in the latest weaponisation of LNG supplies to force Europe to swallow his tariff ultimatum. The Politburo must think they have won the lottery.
Xi can smile as the Pentagon burns up its stocks of munitions and rare earth minerals, all for a diversionary war of impulse.
It is hard to overstate the damage done to American credibility in the Far East. Trump has withdrawn Patriot interceptors and a THAAD missile defence system from South Korea, the only one in Asia because they are needed in the Middle East.
He has sent a half-carrier and a naval flotilla with marines from Japan’s Okinawa to threaten – or attack – Iran’s Kharg Island. The “quick response” unit tasked with defending Asia is now in the wrong theatre.
The Centre for Strategic and Security Studies says the US fired 786 joint air-to-surface stand-off missiles (JASSMs) in the first six days of the war, at a cost of nearly $US3m per missile. It will take several years just to replace them.
It fired 319 Tomahawk missiles, 158 THAADs, 879 advanced precision-kill weapon systems (APKWSs) and a frightening number of Patriots. The figure has risen much further since then. The US is also having to replenish Saudi and Gulf armouries.
These are critical weapons for Taiwan’s defence. There will be fewer on sale to Europe for the defence of Ukraine.
‘America’s Boer War’
The issue is not that China will suddenly attack Taiwan; rather, China may not have to. The Taiwanese people can already see the writing on the wall. The Kuomintang is itching to take the island out of America’s strategic orbit and strike a deal with Xi Jinping. The Iran “excursion” pulls that forward abruptly.
Trump has greatly raised the risk that China will gain a de facto lock hold over 90 per cent of the world’s manufacturing plants for advanced semiconductors and AI chips before the US is able to replace them.
Ronald Reagan knew the limits of American power even with a 600-ship navy and rock-solid allies: Trump is trying to shake down the whole world with a 290-ship navy and largely alone.
“This is looking more and more like America’s Boer War,” said Professor Alan Riley, from the Atlantic Council. Britain won the Boer War in 1902, of course, but it exposed shocking failures in military planning and ended the wishful thinking of “splendid isolation”.
Beware of claims that China is acutely vulnerable as the world’s largest importer of oil and LNG, while America is shielded as the largest exporter. The interlinked supply chains of the global economy can work the other way round.
China is a net exporter of refined petroleum products and fertilisers, which is where the chief crunch lies in the global market. It has imposed export bans on both, trapping its output at home and reducing its immediate oil and gas import needs. Diesel prices have fallen slightly in China over recent days, decoupling from the world market.
The Communist Party is ready for a long energy siege. It controls retail energy prices and can endure the pain longer than US drivers, farmers, airlines or Republicans in Congress.
It has built an electricity grid that can rely almost entirely on domestic coal and homemade renewables operating in tandem. It has rolled out more wind and solar power than the rest of the world combined over the last two years. It can power its AI data centres with watts to spare – unlike the US, which has a near-obsolete grid and has run out of gas turbines.
Beijing has spent the last 20 years planning for this crisis, war-gaming probable US Navy plans to block the Strait of Malacca. The Party remembers all too well that the US Navy imposed a crippling oil embargo on Maoist China after the revolution in 1949.
Specifically, it took advantage of low oil prices over the past year to fill its strategic petroleum reserve as quickly as possible. It has an estimated 1.5 billion barrels, including mandated stocks held by state energy companies.
In short, China would have six months of oil import cover even if supply fell to zero, which is obviously not the case since Chinese ships are still carrying oil from the Arab Gulf states. China is still importing 80 per cent of Iran’s oil exports.
It has $US3 trillion of declared foreign exchange reserves and another $US3 trillion of quasi-reserves held by state banks. It can buy as much oil as it needs, for as long as it takes, on the open world market.
China is in deflation and therefore has a buffer against the corrosive pathologies of inflation that the rest of us face. Chinese borrowing costs have not moved since the war began. Ten-year yields are 1.84 per cent. Compare that with US Treasuries, let alone the doom loop in the UK gilt market.
Trump launched his assault on the aorta of the world’s oil economy without first refilling America’s depleted reserves even to the minimum “safe” level advised by the US energy department.
Beijing has spent the last 20 years planning for this crisis, war-gaming probable US Navy plans to block the Strait of Malacca.
The current drawdown in concert with the IEA will leave the reserve with just 244 million barrels, below the legally permitted floor and nearing levels that risk irreversible damage to the salt caverns.
Helima Croft, a former CIA analyst now at RBC Capital Markets, said the Trump administration fooled itself into thinking that America’s shale bonanza and energy dominance were sufficient shock absorbers.
The hard reality is that US shale output has been drifting down. Data from Baker Hughes show that frackers have cut the number of active drilling rigs in the Permian basin to 243 from 300 a year ago. The industry cannot flick them back on like a light switch.
Trump had better do a deal with the Iranians soon – if he can find any interlocutor whom he has not yet killed, maimed or outed prematurely. If the Strait of Hormuz is closed for another month, it is game, set and match to the Russo-Chinese axis.
Telegraph, London
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