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Russell: Compounding errors, narrow self-interest and narrow ROI threaten global fuel shortage

The current conflict in Iran could turn into a global crisis if major countries like the United States and China continue to make miscalculations, and retreat to narrow interests. The price of crude is a major focus of media attention. Brent crude futures, the benchmark, jumped as high as 20%, to $111.04 per barrel, the highest level since July 2022.

The price of refined fuels like gasoline, diesel and jet fuel has risen even more than crude oil, but this is still not as alarming to consumers.

Jet fuel was the main driver of the explosive increase in refined products prices last week, and Singapore spot prices On March 4, oil reached a record high of $225.44 per barrel, before falling to end the week with a price of $155.82.

This price is still 66.7% above the $93.45 per barrel which was the case on February 27th, the day before the United States and Israel began an aerial campaign against Iran.

Singapore gasoil (the building block of diesel and jet fuel) reached $123.39 per barrel on 4 March, its highest price since September 2023, and up by 33.5% compared to the closing price on 27 February.

The product markets of Asia have begun to reflect a shortage in the supply of fuels essential for keeping economies running.

According to commodity analysts Kpler, the effective closure of Strait of Hormuz will result in a reduction of 18 million barrels of crude oil and products per day. This is roughly divided into 14 million bpd of raw crude and 3,000,000 bpd of finished products.

The market is still not convinced that Iran will not attack any vessel attempting to pass through the Strait.

The Trump administration and Israel's?attack against Iran? made a strategic mistake by closing the Strait of Hormuz.

As with most analysts and probably Gulf governments, I assumed that this conflict would be similar to previous flare-ups.

It was assumed that everyone would act rationally, and not attack oil production or transportation infrastructure. After all, it's in no one's best interest to stop the flow of crude and products.

It turns out that if you say to a religious dictatorship that your goal is regime change, that government will feel little compunction about playing by the old rules.

The decision by Iran to attack its Gulf neighbours, which host U.S. bases, has rewritten all previous calculations regarding the conflict.

Gulf countries Saudi Arabia and the United Arab Emirates are highly dependent on oil, fuel, and liquefied gas exports. Their revenue has been severely cut.

Dubai, as one of the Emirates is increasingly dependent on the fact that it is the financial and tourism center for the region. Both sectors are now suffering a major hit due to the ongoing conflict.

MULTIPLY MISCALCULATIONS

Now, the compounding mistakes of Trump's administration are becoming more apparent.

Their stop-gap solutions have not been well received by the market.

One thing is to provide insurance and maybe even naval escorts. It's another to guarantee safe passage for hundreds of ships each week.

If Iran were to hit a fully loaded crude tanker using a ballistic rocket, the situation would be far worse than it currently is.

It's like giving cookies to an elephant. It is nice, but not very effective.

Asia's refiners have already begun to scramble for crude oil from suppliers outside of the Strait of Hormuz.

What will be the probable outcome of this?

The price of crude oil will increase, and as the Strait closes, the region's need for refined products and crude will grow.

In order to combat this looming crisis, countries with refinery capacity will cut fuel exports and focus on domestic needs. This will exacerbate the shortage of refined goods. Reports indicate that China's major state-owned refining companies have been ordered to stop exports.

Refineries in South Korea and India are cutting back on refinery processing.

Beijing must ask itself how long it will be before the impact of the decision to stop supplying refined fuels to countries that import them is felt on its economy.

This is yet another miscalculation which will be more expensive than the alternative, namely increasing fuel exports in order to help meet demand.

China exports about 600,000 barrels of refined products per day.

It is the only major oil producer with spare capacity, and an estimated crude oil stockpile of over 1 billion barrels.

The level of stocks means that China could refine oil at the current rate for three years even if imports were to drop to zero.

China could, in effect, use its massive stockpiles to boost refinery runs, increase exports, and ease the looming crisis of supply.

It would be very profitable and also gain the approval of nations that import fuels.

Kpler reports that Australia is Asia’s largest fuel importer. It takes?about 900,00 bpd.

Imagine a country that could not meet the demand. This would lead to shortages.

The government must prioritise the production of food and its delivery as well as keeping the economy as active as possible.

A brave Australian government might tell China that it would not ship any more iron ore due to diesel shortages, unless Beijing provided?refined gasolines.

China imports about two thirds of its iron from Australia. Without these flows, its steel industry will be severely curtailed. This would in turn have a devastating effect on manufacturing and construction.

This would only happen if countries continue to pursue their narrow, short-term interests and the Strait of Hormuz is largely closed.

It is unfortunate that the political leaders are not able to understand the strain they put on the energy system. Their actions show that they only see their country's problems, without understanding that this is a global problem that requires global solutions.

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These are the views of the columnist, an author for.

(source: Reuters)