The US-Iran Memorandum and the Approaching Energy Abyss
The signing of a Memorandum of Understanding (MOU) between the United States and Iran last week, aimed at resolving conflicts between the two nations, is highly unlikely to prevent the approaching "energy abyss." This energy abyss will result from the rapid depletion of global commercial and strategic oil reserves, which have previously served as a buffer as most oil tankers ceased transit through the Strait of Hormuz during the conflict—those vessels reportedly transporting approximately 20% of the world's daily oil demand.
Understanding the "Energy Abyss"
As previously explained, the world is rapidly approaching "tank bottoms," which refers to the depletion of available oil and oil product inventories in storage. When these reserves are truly exhausted, a price war for oil and oil products will emerge as millions of barrels per day that are still needed but cannot be obtained from storage when the scenario in the Persian Gulf continues.
Current Situation in the Strait of Hormuz
As of this writing, the Strait of Hormuz has been closed by Iran in response to ongoing military actions by Israeli forces in Lebanon. The first term of the MOU stipulates that hostile actions must cease immediately everywhere, including Lebanon, as a precondition for continued negotiations.
Equally important as whether the strait is open or closed is how each side defines "open" and how shipping companies and insurance companies perceive the risks when passing through this waterway.
| Time Period | Strait of Hormuz Status | Impact on Oil Market |
|---|---|---|
| Pre-conflict | Fully open | No particular risks |
| During conflict | Closed or restricted | High oil prices, supply shortages |
| Post-MOU | Still closed | Market uncertainty, strong price volatility |
Risks and Transportation Costs
According to an unofficial Iranian government spokesperson, Seyed Marandi, an English and Oriental Studies lecturer at Tehran University, the strait could be managed with strict traffic control and much lower speeds than before the war began, that is, assuming it actually reopens.
Although insurance is already available for ships passing through the strait at costs reportedly five times the pre-war rate, charter costs for the voyage appear to be skyrocketing, that is, when those ships are even available. One of the continuing concerns for shipowners is that they cannot be certain that ships entering the Persian Gulf will be permitted to exit, as this seems to change from day to day.
Iran's Strategy
Much of this uncertainty is likely to keep many shipowners at a distance, and this uncertainty in turn works to Iran's advantage as the newly established Iranian Strait of Hormuz Agency can declare the strait "open" while simultaneously stating they cannot force shipping companies to transit through it.
There are sufficient reasons for Iranians to maintain traffic flow at only the minimum level necessary to declare the strait open, allowing negotiations to continue while simultaneously depriving the world economy of oil supplies, liquefied natural gas, and other important products such as sulfur and fertilizers.
Economic Consequences
As the energy abyss approaches, oil prices are likely to recover and potentially exceed previous highs. As the resulting pain transmits through the world economy, including the United States, the Trump administration will be encouraged to reach a stabilization agreement as quickly as possible.
The United States cannot do this without successful negotiations, and Iran has now made clear that those negotiations may not progress unless the United States fulfills the conditions set forth in the MOU. Even as the Iranian foreign minister meets with American negotiators in Switzerland, Iran's Fars News agency reports that the Iranian delegation will "demand the other side fulfill its commitments" agreed upon in the MOU.
| Factor | Pre-conflict Impact | Current Impact | Future Scenario |
|---|---|---|---|
| Oil prices | Stable | Sharp increase | Surge if storage depletes |
| Ship insurance | Standard | 5 times higher | Potentially further increase |
| Charter costs | Stable | Skyrocketing | Ship supply shortage |
| Oil flow | Adequate | Restricted | Dependent on negotiations |
Negotiation Strategy
Moreover, even if the current closure of the Strait of Hormuz is resolved quickly and negotiations continue, the MOU requires 60 days of negotiations. The Iranians can count, and they certainly knew when signing the MOU that "tank bottoms" globally would almost certainly occur THROUGHOUT the negotiation process. This would lead to higher oil prices, weakening the US position and forcing American negotiators to concede more to Iran in exchange for a quick resolution.
As of this writing, it is uncertain whether negotiations will actually proceed soon, aside from the Iranians requiring compliance with the preconditions stated in the MOU. This means the excitement of last week when the MOU was signed will likely fade as the reality of continuing depletion of oil and oil product inventories emerges.
US Government Response
Certainly, the Trump administration will once again try to pressure the oil market downward, and that may work for a short time as has happened in the past. But ultimately, no pressure from the administration or from anyone else can overcome the depletion of reserves—unless those who want lower oil prices have found a way to repeal the laws of physics.
If that happens, I promise to report fully on the event because it would be the most significant scientific wonder of our era.
— Kurt Cobb via Resource Insights