Why are your gasoline prices jumping? Because oil tankers can’t travel through the Strait of Hormuz… and not just due to the Iranians, but because of insurance.
Funny thing about global oil
trade: it’s not controlled by admirals or presidents.
It’s controlled by insurance underwriters in London.
My favorite go-to expert on
all things regarding world shipping is Sal Mercogliano’s amazing YouTube
channel, “What’s Going on with
Shipping”, a nightly TV addiction of mine.
As a former merchant mariner turned academic, Mercogliano points out
that the cost of war
risk insurance is what’s really stopping the tankers.
When you own a $100 million tanker
(empty and not carrying a drop of oil) you usually pay 0.1% – 0.3% of the
vessel’s value per trip for coverage. This
past week the underwriters were demanding 1-3%, or about $1-3
million per voyage.
If 20–40 tankers make that
transit daily, the theoretical exposure could reach $5–10 billion per day of
insured cargo and vessels.
At those prices, anchoring
your tanker becomes cheaper than risking the transit. Because crippling a tanker doesn’t take a
$100 million fighter jet anymore. A
$50,000 drone boat will do just fine: a lot of bang for the buck.
Russian LNG tanker attacked by drone in Mediterranean
The recent Red Sea
crisis of 2023 shows how widespread these
attacks have become: 164 missiles and 265 drones fired at shipping, 79
ships targeted and 29 vessels hit. And
that’s just by
the Houthis. Imagine if a real navy joined the party.
Can the White House realistically
offer to have Uncle Sam underwrite that cost and assume those incredible amounts
of risk? It may have to, right after it
finishes fixing health care, student loans, and the Northeast’s commuter rail
system.
How about US Navy
escorts? That could be done, though in
the Red Sea crisis the Pentagon did not run full convoy escorts like it did
during the 1980s tanker war. And again,
not cheap.
What’s this all mean to Connecticut,
the economy and your wallet?
Like Covid, this may qualify
as what economists call a “black swan” event: extremely rare and unexpected,
having a massive impact and, after the fact, people claiming it was predictable
(which it probably was). So maybe that
makes this a gray swan instead?
Think of the 39-mile-wide
Strait of Hormuz as the Merritt Parkway of global oil traffic: too narrow, over‑capacity,
and one bad move from a miles‑long backup. The difference is that when something goes
wrong in Hormuz it’s not a Subaru crashing into the guardrail near Trumbull… it’s
a supertanker full of crude and a shock to the global economy.
2 million bbl VLCC - Very Large Crude Carrier
With about 20% of the world’s
oil passing through this, the world’s most vulnerable oil chokepoint, we can
expect higher gasoline and home heating oil prices, a devastating effect on the
stock market, a disruption of global supply chains and soaring inflation. That probably means higher food prices, more
expensive airline tickets… and, of course, even higher gasoline prices.
When Hormuz sneezes, the
global economy doesn’t just catch a cold; it ends up in the ER with a stack of
unpaid bills and a lecture from the IMF.
