Strait of Hormuz: Most important oil artery of the world

Three weeks ago I wrote an article ‘Brewing turmoil in Pakistan’s backyard’ and the concluding remarks were, “The fact remains that none of the country (United States or Iran) wants to get the blame for initiating a conflict, but it doesn’t mean that the threat of eminent war is not there. There is a fear that miscalculation or misunderstanding can trigger confrontation and an outbreak of war. As the US expands its military presence in the region, the risk of beginning an accidental war rises further.”

The apprehension came true last Thursday when two oil tankers were attacked and left adrift in the Gulf of Oman. Washington was prompt in accusing Tehran of being behind a similar incident on 12^th May when four tankers were attacked in the same area, a vital oil shipping route. Russia was quick to urge caution, saying no one should rush to conclusions about Thursday’s incident or use it to put pressure on Tehran, which has denied the US accusations. There were no immediate statements apportioning blame after Thursday’s incidents, nor any claims of responsibility.

WHERE IS STRAIT OF HORMUZ LOCATED?

The strait lies between Oman and Iran, It links the Gulf north of it with the Gulf of Oman to the south and the Arabian Sea beyond. It is 21 miles (33 km) wide at its narrowest point, with the shipping lane just two miles (three km) wide in either direction. The UAE and Saudi Arabia have sought to find other routes to bypass the Strait, including building more oil pipelines.

WHY DOES IT MATTER?

Almost a fifth of the world’s oil passes through the Strait - some 17.4 million barrels per day (bpd) versus consumption of about 100 million bpd in 2018. OPEC members Saudi Arabia, Iran, the UAE, Kuwait and Iraq export most of their crude via the Strait. Qatar, the world’s biggest liquefied natural gas (LNG) exporter, sends almost all of its LNG through the Strait.

CURRENT POLITICAL TENSION

The US has imposed sanctions on Iran aimed at halting its oil exports. Iran has threatened to disrupt oil shipments through the Strait of Hormuz if the US tries to strangle its economy. The US Fifth Fleet, based in Bahrain, is tasked with protecting commercial shipping in the area.

MAJOR PAST INCIDENTS

During the 1980-1988 Iran-Iraq war, the two sides sought to disrupt each other’s oil exports in what was known as the Tanker War.

In July 1988, the US warship Vincennes shot down an Iranian airliner, killing all 290 aboard, in what Washington said was an accident and Tehran said was a deliberate attack.

In early 2008, the US said Iranian vessels threatened three of its Navy ships in the Strait.

In July 2010, Japanese oil tanker M Star was attacked in the Strait by a militant group called Abdullah Azzam Brigades linked to al Qaeda claiming responsibility.

In January 2012, Iran threatened to block the Strait in retaliation for US and European sanctions that targeted its oil revenue in an attempt to stop Tehran’s nuclear program.

In May 2015, Iranian ships seized a container ship in the Strait and fired shots at a Singapore-flagged tanker which it said damaged an Iranian oil platform.

In July 2018, President Hassan Rouhani hinted Iran could disrupt oil trade through the Strait in response to US calls to reduce Iran’s oil exports to zero.

In May 2019, four vessels - including two Saudi oil tankers - were attacked off the UAE coast near Fujairah, one of the world’s largest bunkering hubs, just outside the Strait of Hormuz.

Europe might give up on saving JCPOA

Iran’s former ambassador to Norway has warned that Europe might give up on saving the 2015 nuclear pact and the financial mechanism of Instrument in Support of Trade Exchanges (INSTEX), which was established to do business with Iran.

German Foreign Minister Heiko Maas was in Tehran for talks on ways to keep the nuclear deal, officially called the JCPOA in English or Barjam in Persian, alive. 

“It is possible that Europe would no more attach any significance to [saving] Barjam,” Mehr on Monday quoted Abdolreza Faraji-Rad as saying.

Faraji-Rad expressed doubt about the future of Iran-Europe relations, especially due to the growth of far-right groups in European countries manifested in the latest European Parliament elections.

He further said the person who will succeed European Union Foreign Policy Chief Federica Mogherini might not share her insistence on cooperating with Iran and salvaging the JCPOA.

Also the person who will succeed British Prime Minister Theresa May can be more of a hardliner compared to May, which could create a gap within Europe, Faraji-Rad remarked.

“This could mean that Europe might no longer place any importance to Barjam,” he said, underlining that such facts must be taken into careful consideration.

The JCPOA was signed between Iran and six international mediators (the United Kingdom, Germany, China, Russia, the United States, and France) in July 2015. Under the deal, Iran undertook to curb its nuclear activities in exchange for termination of the sanctions imposed previously by the United Nations Security Council, the European Union and the United States over its nuclear program.

On May 8, 2018, the United States unilaterally withdrew from the deal despite worldwide objections and followed the move with a “maximum pressure” policy against the Islamic Republic.

Likely facets of forthcoming Bangladesh Budget

Finance Minister of Bangladesh, Mustafa Kamal is scheduled to announce the budget for financial year 2019-20 in parliament on 13^th June 2019, a few days after the announcement of Pakistan's Budget for the next financial. I have just picked up news from a leading Bangladesh newspaper, which may give Pakistanis a chance to see what is being done there. 

Aiming to invigorate the promising export sector, an ailing stock market and cooling property markets, the upcoming budget is likely to announce a number of incentives to rekindle the business and investment environment, said sources involved in preparing this year’s national budget for parliamentary approval.

The incentives include enhanced subsidies, tax cuts and fiscal stimulus to take the economy to an 8.5% growth rate in financial year 2019-20.

Realtors and land developers have long been demanding a reduction of registration fees, including the Value Added Tax (VAT) and other taxes on the sale and transfer of property, like apartments or land, so as to stimulate the slowing real estate market. According to sources, the upcoming budget is likely to almost halve the current aforementioned costs.

Currently, total fees for flat registration are 14% to 16%, and 17% for land registration. The fee is imposed on the deed value of property.

A budgetary measure is also likely to be announced for the first time for the resale of existing (not new) flats.

National Board of Revenue (NBR) officials think a secondary property market boom would stimulate the economy further if registration fees for used flats were rationalized.

Presently, registration costs remain the same for both new and used flats.

The proposed budget is set to raise the tax-free income ceiling for cash dividend income from stocks to Tk50,000, up from the current ceiling of Tk25,000.

“The Finance Minister is serious about reviving the morale of stock investors in the upcoming budget. A number of budget incentives are in the offing to streamline capital markets,” said a top NBR official. “The market (capital market) will act positively after the announcement in the proposed budget,” he hoped.

Officials concerned at the finance division under the Ministry of Finance said the subsidy outlay in the budget would be around Tk45,000 crore for the next fiscal year, up from Tk38,500 crore earmarked for the current fiscal year.

The highest subsidy amount of Tk9,000 crore is likely to be allocated for the agricultural sector, with some allocation expected to be earmarked for farm mechanization.

The budget is also likely to announce a one percent export subsidy for the apparel sector, in addition to the 4% now applicable for receipts coming from non-traditional markets. The amount to be earmarked is likely to be Tk9,000 crore, which is now around Tk3,500 crore. Presently, 26 export-bound items, including apparel goods, get export subsidies of anywhere between 2% and 20%.

In the current budget, export sector subsidies amount to Tk5,000 crore. Of the total, Tk500 crore is allocated for jute and jute goods.

The power sector subsidy is likely to be earmarked at Tk10,000 crore, and the energy (including LNG) sector is likely to get Tk9,000 crore.

The proposed budget is reportedly set to announce an incentive for foreign exchange remitters, as the government is desperate for more remittances to handle the foreign exchange demand to manage rising import payments.

A subsidy of 2-3% is likely to be offered in the budget for remitters. Under the planned scheme, recipients of remittance will get 2-3% extra local currency on the remitted amount. For this purpose, an amount of Tk3,000 crore will be allocated in the budget.

Why Trump wants talks with Iran without any preconditions?

Decades ago I had heard, “Thugs have a common interest ‘make money’. They cooperate, facilitate and protect each other, though they may appear to the world, the deadliest enemies”. This was confirmed after the US President; Donald Trump announced, “We are ready to talk to Iran without any preconditions”.

I was curious about this change of heart and probed a little deeper. I instantly found a reason, “trillions of US dollars invested in financial derivatives”. The Bank for International Settlements said last year that the “notional amount outstanding for derivatives contracts” was US$542 trillion, although the gross market value was put at just US$12.7 trillion. Others suggested it was US$1.2 quadrillion or more. A person with ordinary wit may ask, what derivatives have got to do with US-Iran animosity?

The reply is simple, bulk of the derivatives are based on energy products, mainly crude oil. Therefore, it all has to do with the Strait of Hormuz. Blocking the Strait could cut off oil and gas from Iraq, Kuwait, Bahrain, Qatar and Iran – 20% of the world’s oil. There has been some debate on whether this could occur – whether the US Fifth Fleet, which is stationed nearby, could stop Tehran doing this and if Iran, which has anti-ship missiles on its territory along the northern border of the Persian Gulf, would go that far.

According to those privy to information, a series of studies hit President Trump’s desk and caused panic in Washington. These showed that in the case of the Strait of Hormuz being shut down, whatever the reason, Iran has the power to hammer the world financial system, by causing global trade in derivatives to be blown apart. The information was duly circulated to France, Britain and Germany, the EU-3 members of the Iran nuclear deal (or Joint Comprehensive Plan of Action), also caused a panic.

Oil derivative specialists know well that if the flow of energy in the Gulf is blocked it could lead to the price of oil reaching US$200 a barrel, or much higher over an extended period. Crashing the derivatives market would create an unprecedented global depression. Trump’s former Goldman Sachs Treasury Secretary Steve Mnuchin knows it better than any other person.

And Trump himself seems to have given the game away. He’s now on the record essentially saying that Iran has no strategic value to the US. He really wants a face-saving way to get out of the problem his advisers Bolton and Pompeo got him into. Washington now needs a face-saving, Iran is not asking for meetings, but it is the sole surviving super power, United States.

They also link it to non-scheduled stop of US Secretary of State Mike Pompeo in Switzerland, just because he’s a “big cheese and chocolate fan”, in his own words. Yet any well-informed also say, “He badly needed to ease the fears of the trans-Atlantic elites, apart from his behind-closed-doors meetings with the Swiss, who are representing Iran in communications with Washington. After weeks of ominous threats to Iran, the US said “no preconditions” would be set on talks with Tehran, and this was issued from Swiss soil.

Buying oil from other sources can cause a big dent to Indian economy

In India, top ministers of Narendra Modi government held talks on the issue of investment in petroleum and gas sector a month after the US waiver for India to import oil from Iran came to an end. The meeting chaired by Home Minister Amit Shah was attended by Finance Minister Nirmala Sitharaman, External Affairs Minister S Jaishankar, Petroleum and Natural Gas Minister Dharmendra Pradhan and Railways and Commerce Minister Piyush Goyal.

The meeting gained significance as US President, Trump’s administration told India, China, Turkey and a few other oil customers of Iran that no waiver on sanctions would be granted to them after 1^st May 2019, ending six months of exception to the sanctions.

The US had granted exemptions to India, China, Japan, South Korea and Turkey “to ensure a well-supplied oil market” in November last year for six months after it re-imposed sanctions on the Persian nation in view of its controversial nuclear program.

India is said to be in touch with the US to seek further extension of the waiver on oil imports from Iran, pointed out that it has been gradually reducing its energy purchases from the Islamic country.

Two weeks after the US decision came into force, Iranian Foreign Minister Mohammad Javad Zarif travelled to India and met the then External Affairs Minister Sushma Swaraj. After her meeting with Zarif, she had said a decision on India’s oil imports will be taken after the elections keeping in mind India’s commercial considerations, energy security and economic interests.

Following the withdrawal of the US waiver, India has stopped contracting oil shipments from Iran. With 80 per cent of India’s requirements being met through imports, higher-priced oil from non-Iranian sources can make a big dent in the country’s current account deficit and foreign exchange reserves.

Oil imports from Iran in the past fiscal year ended March 2019 amounted to about US$9 billion. Official sources have said that getting oil from alternative sources would have financial implications and lead to further pressure when crude prices touch US$75-80 per barrel in the near-term, putting pressure on India’s import bill.

Iran used to offer India a longer credit period of 60 days compared to other crude suppliers, while the cargo insurance was free.

Imports from Iraq, UAE and Saudi Arabia will now be on the higher side, without some of the benefits that Iran was giving, India has been Iran’s second largest customer of oil, after China.

Chinese President says US pressure on Iran worrying

A rise in tensions in the Middle East owing to the US pressure on Iran is worrying and all parties need to exercise restraint, Chinese President Xi Jinping told Russian media ahead of a visit to the country.

Tension between Iran and the US has escalated over the past months, after the United States pulled out of a deal between Iran and global powers to curb Tehran’s nuclear program in return for lifting sanctions.

Washington re-imposed sanctions last year and tightened them sharply at the start of last month, ordering all countries to halt imports of Iranian oil. It has also hinted at military confrontation, sending extra forces to the region to counter what it describes as Iranian threats.

Chinese President told TASS news agency and Rossiyskaya Gazeta newspaper that because of the “extreme pressure” Washington has put on Tehran and the unilateral sanctions, tensions have continued to rise in the Middle East.

He reiterated, “The development of the situation is worrying.”

The Iran nuclear deal should be fully implemented and respected, as it is of crucial importance for peace and stability in the Middle East and non-proliferation, Xi added.

 “China and Russia’s views and positions on the Iran nuclear issue are highly aligned, and both hope that all relevant parties remain rational and exercise restraint, step up dialogue and consultations and lower the temperature on the present tense situation,” he said.

China has been angered by U.S. threats against countries and companies that violate U.S. sanctions by importing Iranian oil. China and Iran have close energy ties.

Xi did not directly address the oil sanctions issue, but appeared to allude to them by saying: “China will continue to firmly safeguard its own legitimate and lawful rights and interests”.

Iranians told not to take Trump’s bait and stay calm

A number of former Obama administration officials have quietly urged Iranian government officials to keep their heads cool in the face of the Trump administration’s maximum pressure policy against Tehran.

US officials have reached out to their contacts in the Iranian government, including Foreign Minister Mohammad Javad Zarif to tell them, “Don’t take Trump’s bait and stay calm”.

Conversations between former Obama officials and Iranian government officials have been ongoing since November 2016. But the recent round of conversations, which took place over the phone and in person over the last two months, came as lines of communication between the US and Iran, through intermediaries in Europe and elsewhere.

Tensions between Iran and the U.S. have grown in recent weeks, especially after the latter deployed an aircraft carrier strike group, B-52 bombers, and 1,500 more American troops in the region, citing unidentified Iranian “threats”. Iran’s Deputy Foreign Minister Abbas Araqchi said, “We are aware that evident elements are trying to put America into a war with Iran for their own goals.” He said US National Security Adviser John Bolton and “other warmongers” are plotting against Iran.

“War would be a disaster for everybody in the region. We hope that wisdom will prevail in Washington, that they do not make this biggest mistake in the region ever. But we are fully prepared for that scenario,” Araqchi said.