An Oil Strategy in Case Iran’s Navy Shuts Down the Strait of Hormuz

Let’s just say Iran makes good on its recent threats to shut down the Strait of Hormuz. And let’s say that with one-fifth of the world’s oil supply bottled up, the price of a barrel of oil then almost doubles, as some analysts predict, to more than $200.

What can the world do to bring prices down before a still- woozy global economy gets pushed back into recession?

Pipelines that circumvent the strait could carry to market at least 7 million of the 17 million barrels of tanker-borne oil that passes through the strait each day. The U.S. could, for the first time since the Gulf War in 1991, release oil from its 700 million-barrel Strategic Petroleum Reserve; other members of the International Energy Agency (set up after the 1973-74 oil crisis) could also tap the 90-day supply stocks that they are required to maintain.

The IEA has already prepared a plan to release as many as 14 million barrels a day in the event of a Gulf closure. Saudi Arabia, long the self-appointed swing man of the Organization of the Petroleum Exporting Countries, has a spare production capacity -- on paper, at least -- of about 3 million barrels per day; everyone else is producing almost flat out.

The U.S. now gets only about 9 percent of the oil it consumes from the Persian Gulf. Countries such as China, India, Japan and South Korea, however, rely on Gulf exports, particularly from Iran, to power their economies. In the European Union, debt-ridden Greece gets 14 percent of its oil imports from Iran, Italy 13 percent and Spain almost 10 percent. And because oil is a global commodity, as far as oil prices are concerned, what happens in the Persian Gulf does not stay in the Persian Gulf.

For all Iran’s missile-rattling, however, there is little reason to think it will carry through on its bluster. To block the Gulf would verge on economic suicide: Petroleum products account for 20 percent of Iran’s gross domestic product, 80 percent of exports and 70 percent of its government revenue. Any attempt to close the Gulf could also provoke a war with the U.S. and vaporize what diplomatic support and leverage Iran gets from countries (and clients) such as China.

Iran may not intend ultimately to close the strait, but its threats to do so can still instigate tremendous economic uncertainty with very real consequences, especially in a hyper- connected world wired with complex speculative instruments. The challenge is similar to dealing with terrorist groups such as al-Qaeda, which command our attention and resources through their potential no less than their actions. In either case, the goal is to balance the risks that such threats present with the costs of protecting against them.

More pipelines would be a good start. Unfortunately, the United Arab Emirates just announced that the opening of a 1.8 million barrel-per-day pipeline that circumvents the strait will be put off until May. The use of drag-reduction agents -- an estimated $600 million investment -- could increase the capacity of Saudi Arabia’s existing two pipelines that reach the Red Sea to as many as 11 million barrels per day. And if the Kingdom wants to bolster its reputation as a “stable, reliable” supplier of oil, it could invest the several billion dollars needed to build another pipeline -- a prospect that may be less painful if oil prices remain high. The current turmoil is another reason why Iraq needs to repair its pipeline to Turkey. At home, we support the building of the Keystone XL pipeline that will bring oil from Canada’s tar sands to market.

The IEA’s plan to release oil from emergency stocks will only work if China, India and other non-IEA countries agree not to hoard. That would require an unprecedented degree of policy coordination. One way to reduce future shocks, especially in Asia, may be more positioning of exports in regional storage depots and greater use of floating stocks. Governments may also want to dust off the IEA’s 2005 blueprint for cutting the amount of fuel consumed by cars, trucks and buses. If the crisis continues, the market’s response could also be an important first test of the Commodity Futures Trading Commission’s soon- to-be-imposed limits on trading by speculators.

Over the last few years, the U.S. has reduced its dependence on oil imports in general and from the Middle East in particular. Yet, almost four decades after the first oil shocks, the economy remains deeply vulnerable to the threat of a cutoff of oil from the Persian Gulf -- a state of affairs that calls into question the commitment of, by some estimates, trillions of dollars to keep the Gulf stable and the Strait of Hormuz open. Factor that “externality” into the price of a barrel of oil, and alternative fuels begin to look like a bargain by comparison -- at least until someone figures out how to take away the sun, wind, rivers and tides.
(bloomberg.com)

Most Asia Stocks Rise on U.S. Economic Optimism

Jan. 11 (Bloomberg) -- Ethan Devine, a partner at Indus Capital Partners LLC, talks about the scandal at Japan camera maker Olympus Corp. Olympus shares rose the most in more than two months yesterday on optimism the company will survive a delisting threat and after its auditors took legal action against executives over a $1.7 billion accounting fraud. Devine speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

Asian stocks swung between gains and losses as optimism about the U.S. economy tempered concern Europe’s debt crisis is worsening ahead of a German bond sale.

James Hardie Industries SE (JHX), a maker of building materials that gets most of its sales in the U.S., climbed 3 percent in Sydney. AU Optronics Corp. (2409), a supplier of liquid-crystal displays to Nokia Oyj and Dell Inc., gained 4.4 percent in Taipei. China Unicom (Hong Kong) Ltd. fell 3.7 percent amid concern competition will increase among mainland telecoms.

“There are more positive signs particularly on employment” and consumer spending in the U.S., saidStephen Halmarick, Sydney-based head of investment markets research at Colonial First State Global Asset Management, which oversees about $150 billion. “The outlook in the U.S. is for modest growth this year, and that’s better than Europe. Expectations are Europe will be in a recession.”

The MSCI Asia Pacific Index added 0.1 percent to 116.23 as of 3:22 p.m. in Tokyo, having swung between gains and losses at least eight times. About three shares rose for every two that fell on the measure. The gauge advanced 0.9 percent last week as manufacturing growth from China to the U.S. bolstered confidence in the global economy.

Australia’s S&P/ASX 200 Index increased 0.9 percent, while Japan’s Nikkei 225 Stock Average rose 0.3 percent. Hong Kong’s Hang Seng Index added 0.3 percent. South Korea’s Kospi Index lost 0.4 percent.
China Inflation

China’s Shanghai Composite Index (SHCOMP) decreased 0.2 percent on concern inflation will hamper the government’s ability to ease lending curbs. A report due tomorrow will probably show consumer prices rose 4 percent in December, according to analysts’ estimates.

Futures on the Standard & Poor’s 500 Index fell 0.2 percent today. The gauge rose 0.9 percent in New York yesterday as global equities rallied amid bets that China will ease monetary policy to spur growth in the world’s second-largest economy.

Exporters advanced as U.S. employers hired 4.15 million workers in November, 107,000 more than in the prior month, the Labor Department said yesterday. A survey by Chief Executive magazine showed confidence among American CEOs rose last month to the highest level since May.

James Hardie rose 3 percent to A$7.12 in Sydney. AU Optronics climbed 4.4 percent to NT$14.30 in Taipei. LG Display Co. (034220), the world’s second-largest LCD maker by sales, gained 2.7 percent to 26,800 won in Seoul.
Europe Risk

“The strong outlook and underpinnings of the U.S. economy are much more important to the Asian market outlook than European uncertainty,” said Sandy Mehta, Hong Kong-based chief executive officer of Value Investment Principals Ltd. “We think the Europe situation remains difficult and presents risk, but much of this is already discounted by investors and the situation will be more stable by mid-year.”

Reports today may show Germany’s economic growth slowed last year and Spanish industrial production shrank by the most since 2009. Spain will auction as much as 5 billion euros ($6.4 billion) of bonds due 2015 and 2016 tomorrow, while Italy is scheduled to sell 12 billion euros of bills. Germany will auction 4 billion euros of five-year notes today.

Raw material producers advanced after the London Metals Exchange Index (LMEX), which tracks prices of six primary metals including aluminum and copper, rose for a third day yesterday. Aluminum prices may rise more than 6 percent by the end of the quarter as processing companies replenish inventory to meet demand, said Vedanta Resources Plc, India’s biggest producer.
Apple’s iPhone

BHP Billiton Ltd. (BHP), the world’s biggest mining company, increased 1.5 percent to A$36.18 in Sydney. Jiangxi Copper Co., China’s largest producer of the metal, advanced 1.7 percent to HK$17.88 in Hong Kong. Aluminum Corp. of China Ltd., the nation’s No. 1 supplier of the light metal, climbed 2.6 percent to HK$3.62.

Chinese phone companies declined today amid concern increasing competition will hurt profit as China Telecom Corp., the nation’s third-largest carrier, moves closer to getting government approval to offer Apple Inc.’s iPhone.

China Unicom, the mainland’s only iPhone distributor, sank 3.7 percent to HK$15.84. China Telecom lost 1.4 percent to HK$4.22.

The MSCI Asia Pacific Index (MXAP) lost 17 percent in 2011 as China took steps to cool its property market and Europe struggled to resolve its debt crisis. The S&P 500 Index broke even for the year and the Stoxx Europe 600 Index dropped 11 percent. Stocks in the Asian gauge were valued at 12.2 times estimated earnings on average as of yesterday, compared with 12.3 times for the S&P 500 and 10 times for the Stoxx 600.

Tokyo Electric Power Co., the utility at the center of the Fukushima Dai-Ichi nuclear disaster, declined 6.1 percent to 202 yen. Tepco, as the company is known, is in talks with banks to borrow as much as 2 trillion yen ($26 billion) to help stave off bankruptcy.

To contact the reporters on this story: Jonathan Burgos in Singapore at jburgos4@bloomberg.net; Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net
(bloomberg.com)