Commentary
Gas prices in the United States are rising due to the near-closure of the Strait of Hormuz. American consumers are expressing dissatisfaction.
Approximately 20 percent of global oil and gas, and a third of global fertilizer, transit the strait. The average U.S. gasoline price has increased to $3.98 per gallon on March 26, and crystalized nitrogen used in fertilizer has increased by a third since the start of the war.
Iran has almost 172 million barrels of oil, about two months’ worth of its production, stored on tankers at sea. On March 20, Washington issued a 30-day sanctions waiver on this oil to get it released into global oil markets. The hope is that the release will at least slightly decrease the global price of oil and gasoline, trickling down to the United States and thereby decreasing inflation. However, China is the main buyer of Iranian oil and is likely to benefit more than U.S. consumers.
The oil is held in a vast shadow fleet that stretches from Iran to China, and the U.S. waiver only lasts until April 19. Crucially, it does not relax financial sanctions on Iran, and so does not allow payment for the oil. This gives only a subset of oil traders—for example, those in India and China—a little time to complete their trades using alternative currencies like the yuan, and then offload the oil from the aging tankers by the time limit. The Iranian oil is unlikely to be sold to European and U.S. buyers, though it may free up other oil—for example, in Saudi Arabia and Oman—for sale to the West.
There are still reputational risks to buying Iranian oil, even when the United States has waived its sanctions. Major Chinese oil refiners, such as the state-owned Sinopec, stopped buying Iranian oil as early as 2018, when the United States imposed sanctions on Iran. After the waiver, Chinese majors reportedly continue to reject Iranian oil, preferring to avoid shadow-fleet oil and the risks of the Strait of Hormuz by drawing on Saudi Arabia’s Yanbu port on the Red Sea.
Sinopec is also asking Beijing to allow it to draw from China’s oil reserves. However, last month, Beijing rejected a similar request from Sinopec to draw 13 million tons from the reserves. This could indicate that Beijing believed the price of oil would increase, which it did, or that it wanted to maintain the reserves for other reasons, such as an invasion of Taiwan.
Small private “teapot” refiners, mostly in Shandong Province, purchase approximately 80 percent of Iran’s shipped oil and relabel it as Malaysian or Indonesian crude. This allows them to purchase the Iranian oil at a discount due to U.S. sanctions. Teapot refiners represent approximately one quarter of China’s oil refining capacity. The U.S. waiver on Iran will remove that discount at least temporarily.
The waiver had an immediate effect on Iranian sales to China in an increase in the offered price of the oil to Chinese buyers. While Iranian Light sold for $10 less per barrel than ICE Brent last month, after the U.S. waiver, the Iranian oil sold for a slight premium.
However, if more buyers from India or Europe come online for the oil, the continued payment sanctions could cause them to be sent in yuan through China’s banking system rather than in dollars through U.S. and allied systems like SWIFT in Belgium. This would increase China’s centrality to the global oil trade. China would also benefit from the waiver if it allowed Sinopec and other majors to purchase the waived Iranian oil.
Another U.S. government program to free oil transits through the Strait of Hormuz that could benefit China is a $20 billion political risk insurance program. As China imports 40 percent of its oil and about 20 percent of its liquified natural gas (LNG) through the strait, the regime in Beijing would be a major beneficiary unless the program ensured that China were charged market prices, or more, for the insurance.
Better options would arguably be to seize Iran’s tankers and oil and sell them to cover U.S. and allied expenses for containing Iran. This could require the passage of new U.S. laws, as the sale of one tanker seizure is now tied up in U.S. courts. Over the course of three months, the tanker has cost the United States $47 million to maintain.
Likewise, rather than offering subsidized insurance to Chinese ships and cargoes for passage through the strait, the United States could charge transit fees, given the costs to the U.S. taxpayer of securing the waterway. Adversary countries such as Iran, China, Russia, and North Korea should never benefit from the blood and treasure expended by the American people to provide global security. They should instead be nickel-and-dimed by that security until they democratize.
