Ambrose Evans-Pritchard
Britain and France “won” the Suez war in 1956. They destroyed Egypt’s air force on the ground and gained total control of the skies within hours.
They crippled Egypt’s tank forces. The assault was professional and achieved all of its immediate military objectives.
Yet the Suez crisis degenerated into their worst humiliation since 1940 because the two powers failed to anticipate the economic fallout. Both faced capital flight and pressure on their fixed exchange rates.
In a larger sense, they misread the world’s post-imperial mood.
Donald Trump risks his very own Suez crisis if he lets this conflict drag on through March. Markets may have rallied after he pronounced the war “very complete”, but Iran is still fighting and the Strait of Hormuz is still closed.
He launched this war with 21 days’ consumption cover in the US strategic petroleum reserve – China is thought to have at least 120 days’ cover – and with inadequate warships to protect shipping.
The 20-million-barrel buffer of “floating” Russian crude has mostly been soaked up already. Vladimir Putin will not step into the breach. He is already exporting as much as he can.
Michael Haigh and Ben Hoff, from the Societe Generale bank, estimate that the war has cut off 17 million barrels a day (b/d) of oil supply, or a sixth of global consumption. It is worse for liquefied natural gas.
Iraq has run out of storage and has been forced to slash production by 3 million b/d. Kuwait is following suit. Abu Dhabi will do so within days.
Saudi Arabia has more storage but has had to close the Safaniya, Marjan, Zuluf and Abu Safa fields because of drone attacks, curtailing more than 2 million b/d. Energy experts at Argus say almost 7 million b/d has already been shut in across the region.
The Saudis can divert some crude through the East-West pipeline to the Red Sea, but the port at Yanbu has capacity limits and is within drone-strike range of the Houthis, a Yemeni Shiite militia aligned with Iran.
Disruption escalates in a non-linear way once drillers close oil fields. The first couple of weeks upsets the “reservoir physics”.
“Restarting field production of this scale will be a massive technical exercise,” said Jim Burkhard, the chief oil analyst at S&P Global Energy.
Beyond a month, the damage to well pressure and flowlines becomes permanent.
“In our view, $US200 [per barrel] is not outside the realms of possibility in 2026,” said Simon Flowers, the chairman of energy consultants Wood Mackenzie.
That would be a horror story for gas too. Societe Generale said funds are betting on a strike price of €200 ($326) per megawatt-hour for September natural gas futures in Europe. The same contract was €26 a few weeks ago.
Trump has talked of a $US20 billion ($28.1 billion) fund backed by the US Development Finance Corporation to cover war reinsurance for Gulf shipping. This reveals how little the White House understands the global maritime and insurance market.
Helima Croft, a former CIA analyst now at RBC Capital, said the task of shifting the vast fleet of stranded ships on both sides of the Strait of Hormuz threatens to overwhelm the “entire $US205 billion statutory risk limit” of the US government agency.
She said Iran still has an arsenal of long-distance drones that can be deployed from anywhere and “an ample supply of small, fast boats that can be packed with explosives to target ships”.
The new and dangerous twist is that China has sent its state-of-the-art Liaowang-1 signals intelligence vessel to the region with an escort of destroyers.
Defence Security Asia said its electromagnetic sensors could give the Iranians instant data on US and Israeli aircraft, quoting one specialist calling it a “floating supercomputer processing petabytes of data to map the invisible battlefield”.
The Kuwait Petroleum Corporation said maritime insurance on its own is not enough. Sheikh Nawaf al-Sabah, the chief executive, vowed that he will not risk the lives of crews.
“We’re prepared to move through the Gulf if we can get some level of assurance on safe passage from the US Navy, but there’s not yet a plan in place for a naval escort,” he said.
“There has been oil traffic through the Strait of Hormuz for over 80 years and not a single day of those 80 years has it ever been closed to traffic. After eight decades, we have now entered a new era of geopolitics,” he said.
Well, indeed.
Trump posted on Truth Social that the naval escort would soon be assembled. It has not been done and cannot physically be done in time to avert a global energy crisis as long as the war continues.
The US has just 12 warships in the Gulf region. They are needed to prosecute the attacks. It would take a fleet of 20 ships to handle the constant stream of tankers. The mission would need minesweepers from Europe.
Without seeming to realise what he has done, Trump has exposed the raw fact that the US is no longer a full-spectrum military hegemon able to project power simultaneously in multiple theatres across the planet. It has superb armed forces and technology – but that is not the same thing.
Ronald Reagan’s defence budget reached 6.7 per cent of GDP in the late 1980s. Trump commands a navy that has shrunk by half and a military budget of 3.4 per cent. Declaring that the Pentagon is renamed the Department of War alters nothing.
Trump said the US is immune to the energy shock because it has achieved oil and gas supremacy and is a net fossil fuels exporter.
“It doesn’t really affect us,” he said.
So which will prevail in the tug of war within Trump’s personality: his fear of losing the US midterm election? Or his injured vanity and his psychological need to command “escalation dominance”, always and everywhere?
This is nonsense. Oil is a fungible commodity and is priced globally.
The US could reimpose Jimmy Carter’s oil export ban and partially break the price linkage, but it still has to import a colossal 9 million b/d, either in petroleum products or as heavy sour crude to balance Texas light sweet in its refineries.
Americans drive twice as far each year as West Europeans and the average fuel efficiency of their cars is roughly half. They are four times as vulnerable to the price. They also fly twice as far per capita.
The average petrol price at the pump in the US has risen from $US2.90 a gallon ($1.077 per litre) in mid-February to $US3.50 ($1.29 per litre) so far. Diesel prices have doubled to $US4.60. Jet fuel is up by even more. That alone will hurt in a K-shaped economy shedding jobs fast and where the bottom half is already raging about “affordability”.
Prices will rise mechanically, with a lag, the longer that Gulf drillers suffer structural damage. Nobody knows where the breaking point lies in US politics, but another hike in oil prices to $US150 a barrel would surely shatter Trump’s electoral base. $US200 would destroy his presidency.
It is true that the oil intensity of US and global GDP has halved since the Arab embargo of 1973, but that episode was chiefly confined to oil. Qatar’s Ras Laffan, now the world’s largest exporting port for liquefied natural gas, was then a fishing village. LNG was not exported from the Gulf until 1996.
The region did not then produce 30 per cent of the world’s urea or supply 20 per cent of the fertilisers used by America’s farmers, badly needed now for spring planting. It did not account for an eighth of the world’s polypropylene and ethylene, or a tenth of its aluminium. It was a different world.
Markets expect Trump to declare victory soon, before he is overwhelmed by a supply chain shock to match COVID.
That bet is probably correct, but Iran’s Revolutionary Guard have so far refused to make it easy for him by rolling over.
“It is we who will determine the end of the war,” they said on Tuesday.
So which will prevail in the tug of war within Trump’s personality: his fear of losing the US midterm election? Or his injured vanity and his psychological need to command “escalation dominance”, always and everywhere?
