IWhy are your gasoline prices jumping? Because oil tankers can’t travel through the Strait of Hormuz… and not just due to the Iranians, but because of insurance.
Funny thing about global oil trade: it’s not controlled by admirals or presidents.
It’s controlled by insurance underwriters in London.
My favorite go-to expert on all things regarding world shipping is Sal Mercogliano’s amazing YouTube channel, “What’s Going on with Shipping”, a nightly TV addiction of mine. As a former merchant mariner turned academic, Mercogliano points out that the cost of war risk insurance is what’s really stopping the tankers.
When you own a $100 million tanker (empty and not carrying a drop of oil), you usually pay 0.1% – 0.3% of the vessel’s value per trip for coverage. This past week the underwriters were demanding 1-3%, or about $1-3 million per voyage.
If 20–40 tankers make that transit daily, the theoretical exposure could reach $5–10 billion per day of insured cargo and vessels.
At those prices, anchoring your tanker becomes cheaper than risking the transit. Because crippling a tanker doesn’t take a $100 million fighter jet anymore. A $50,000 drone boat will do just fine: a lot of bang for the buck.
The recent Red Sea crisis of 2023 shows how widespread these attacks have become: 164 missiles and 265 drones fired at shipping, 79 ships targeted and 29 vessels hit. And that’s just by the Houthis. Imagine if a real navy joined the party.
Can the White House realistically offer to have Uncle Sam underwrite that cost and assume those incredible amounts of risk? It may have to, right after it finishes fixing health care, student loans, and the Northeast’s commuter rail system.
How about US Navy escorts? That could be done, though in the Red Sea crisis, the Pentagon did not run full convoy escorts like it did during the 1980s tanker war. And again, not cheap.
What’s this all mean to Connecticut, the economy and your wallet?
Like Covid, this may qualify as what economists call a “black swan” event: extremely rare and unexpected, having a massive impact and, after the fact, people claiming it was predictable (which it probably was). So maybe that makes this a gray swan instead?
Think of the 39-mile-wide Strait of Hormuz as the Merritt Parkway of global oil traffic: too narrow, overcapacity, and one bad move from a miles-long backup. The difference is that when something goes wrong in Hormuz, it’s not a Subaru crashing into the guardrail near Trumbull… it’s a supertanker full of crude and a shock to the global economy.
With about 20% of the world’s oil passing through this, the world’s most vulnerable oil chokepoint, we can expect higher gasoline and home heating oil prices, a devastating effect on the stock market, a disruption of global supply chains and soaring inflation. That probably means higher food prices, more expensive airline tickets… and, of course, even higher gasoline prices.
When Hormuz sneezes, the global economy doesn’t just catch a cold; it ends up in the ER with a stack of unpaid bills and a lecture from the IMF.
