The Iran Conflict and Global Supply Chains

The phrase “Global Supply Chain” entered our public discourse several decades ago, but it’s gaining significance now, as the US military pursues a new war in the Middle East, an area much more fully engaged now than ever before in world trade and economics.

When President Trump was asked recently what surprised him most about the Iranian response to our attack, his answer was Iran’s strikes on Arab countries in the region, an answer that seems puzzling, given the geo-political and economic realities of the 21st Century. Iran’s long-standing support of terrorist groups like Hezbollah, the Houthis, and Hamas, that has caused great instability for Iran’s Arab neighbors in the Middle East, should certainly have led us to expect Iran might well attack them directly, especially since Iran has no capacity to attack the US homeland at present.

Persian (not Arab) Iran has long been the outlier Islamic country in the region. Its “pariah-state” isolation since the 1979 revolution left it free to pursue its own agenda of sowing discord with terrorist agitation in many of its neighboring countries, which nevertheless (or perhaps because of Iran’s threat) became evermore engaged in global affairs and the global economy. Despite pariah status and severe economic sanctions, Iran still wields great power: its dronemanufacturing capabilities are prolific; its oil exports are substantial, despite economic sanctions; and it controls the Strait of Hormuz, through which passes about 20% of all world oil production, including significant percentages of that produced by Saudi Arabia, Kuwait, Iraq, and United Arab Emirates.

Of course, the US produces enough oil, natural gas, and coal to be energy-independent, or we could be, were it not for the complicated nature of shipping those things to the various places where we need them for consumption: not all of us live in close proximity to an oil field. Shipping is expensive, whether by pipeline or by ocean tanker. So the US imports lots of natural gas from Canada (via pipeline) for consumption in the Midwest, as well as Canadian oil for refineries in the Mountain States; and we export lots of petroleum and petroleumbased products via tanker from terminals in Texas (3 of the largest in the U.S.) and Louisiana (1). There are, of course, other ports where oil and refined products flow in and out of the country, located on our East and West coasts as well.

However, in addition to the mis-match geographically of where we produce and consume oil products, we must consider the nature of oil itself and of refining it, which create other import/export needs. Our mostly aged refineries were built to process the “heavier” oil production from the US oil fields of the 1950s to the 1990s. The lighter crude we produce in the US now (since shale fields became productive) has greater value being exported for the most part. Thus the US is a significant importer of heavy crude, which is especially well-suited for making all the diesel required for transportation of goods from coast to coast by rail and truck.

Bottom line: the run-up in oil prices that we face now is unlikely to fade as long as the Strait of Hormuz is closed to shipping. That time frame could be significantly lengthened even if the Strait is opened, if Iran were to use its drones to attack and destroy the two dozen or more oil shipping terminals along the shores of the Persian Gulf, all owned by those oil-exporting neighbors.

For our local residents who are oilfield royalty owners, it’s a time of bigger oil checks; for everyone else, it means a time of more pain at the gasoline and/or diesel pumps.

And all this comes to us, thanks to the Global Supply Chain.