I’m undertaking a 1000-day reinvention project, blogging here daily to track my progress. In Thursday Thinker, I share a smart idea or theory.
The argument that the United States is immune to a Strait of Hormuz closure because of our ample domestic energy production is a tempting but incomplete narrative. While it’s true the U.S. produces a vast amount of natural gas and petroleum, we remain deeply integrated into a global system that doesn’t allow for total isolation.
The U.S. is actually a net importer of crude oil. Our petrolum exports include natural gas, which we produce in abundance as a byproduct to producing oil, and that makes us a net exporter. But we import about 3 million barrels a day of crude. Higher prices (set globally at the margin) may be good for American oil companies, but they are bad for U.S. consumers and businesses.
More important, the closure of a major shipping lane halfway around the world affects far more than just crude oil.
In their article about the effect of the Strait of Hormuz crisis on plastics and food supply chains, Joseph Webster and Kate Burnett of the Atlantic Council and Global Energy Center, respectively, write:
Every day that the Strait of Hormuz remains closed brings the world economy closer to a crisis. While the closure has acutely affected oil and gas supplies and prices, it could soon send convulsions through supply chains for other commodities, such as plastics and fertilizers, that are foundational to the global economy and food supplies. This cascade of effects could strengthen China and Russia’s geopolitical influence over impacted supply chains, while hurting consumers around the world, including in the United States. If the Strait of Hormuz closure persists for even a few more months, it could become the single-largest and most consequential energy and supply chain disruption in modern history, all but ensuring a global period of stagflation.
Let’s take plastics first. The Strait is often called an oil artery, but it is equally a petrochemical bridge. The Middle East provides roughly 25% of global polyethylene and polypropylene exports. 84% of that capacity must pass through the Strait of Hormuz to reach the global market. The disruption begins with naphtha, a crude oil derivative that serves as the primary feedstock (i.e., raw material) for plastics in Asia and Europe. With the Strait closed naphtha flows have been throttled, forcing Asian manufacturers to cut production by up to 50%. Because 99% of the world’s plastics are derived from fossil fuels, the recent 40% spike in oil prices has sent polyethylene prices to their highest levels in 25 years. This means higher prices for the milk jug in your fridge, the medical tubing in a hospital, or the film protecting your Amazon delivery. The cost of the container is now rising faster than the product inside. This will likely show up on U.S. store shelves as a second wave of inflation within the next two to four months.
This crisis will also hit our dinner tables. The Persian Gulf is the world’s most critical nitrogen hub, accounting for roughly 30% of globally traded ammonia-based fertilizers. While the U.S. doesn’t rely in ammonia imports routed through the Strait, the closure restricts global supply. This drives up prices in U.S. markets. In just three weeks following the February 28th attack on Iran, urea prices at the New Orleans hub (which provide the benchmark for Amerian farmers) increased by 28%, jumping from $518 to over $660 per metric ton. Global food prices may rise 12 to 18% above pre-crisis levels by the end of the year, according to Helios AI, a food price aggregation platform, even if the crisis ends quickly. For the American consumer, this means that even if gas prices stabilize, the cost of bread, meat, and produce is essentially locked in to an upward trajectory for the next harvest cycle.
Expect waves of inflation
Webster and Burnett argue that far from being immune to these disruptions, consumers around the world will face “waves of economic pain”:
The first two waves will crest in the form of higher refined product prices. This is already happening: jet fuel has low storage inventories and is therefore sensitive to supply outages. Accordingly, jet fuel and air ticket prices are soaring, especially in Asia. The rest of the world will quickly follow. Other refined products, such as diesel and gasoline, will be in the next wave.
The third wave of price increases will ripple throughout the US and global economy in the form of higher agricultural prices. As ammonia, fertilizer, and diesel input prices rise, farmers will plant less and crop yields will fall, sending consumer food prices higher. If Beijing, in partnership with Moscow and Minsk, selectively restricts agricultural-related exports, then US and global inflation will run higher.
The next inflation wave may be less visible, but more insidious. Food packaging, medical supplies, clothing, and virtually every manufactured good rely on petrochemicals in some way. Accordingly, petrochemical outages in the Asian democracies would trigger broad-based price increases in the United States. If China imposes export controls on certain petrochemical products (just as it does for critical minerals), US inflation will likely run higher.
Strengthening China and Russia
A key point the analysts make is that China and Russia stand to gain, while the U.S. stands to lose. In the domain of plastics, Chinese petrochemical firms have access to abundant electricity (for example using coal) as well as a feedstock from its partner Russia. While other Asian countries are cutting output due to worries about availability of electricity and feedstock, China could take this opportunity to consolidate their control over the plastics supply chain.
In the area of fertilizer and food, China has already taken steps to respond to the crisis. They are the second largest fertilizer exporter in the world, and have enacted export restrictions to shield their farmers and consumers from price shocks. This further tightens global markets. This strengthens Russia’s position. Russia is the world’s largest exporter of fertilizer and its partner Belarus is a major player in potash, used in fertilizer. This gives them not just a way to make more money (as fertilizer prices increase) but influence over global fertilizer markets.
What the future holds
The president’s national address last night about the conflict in the Gulf provided few details about how it might evolve. He did again exhort countries that depend the most on global oil shipments transported through the Strait of Hormuz to “take care of that passage.” He said they must “build up some delayed courage,” without calling specific countries out by name. His rhetoric has softened a bit from a few days prior, when he told NATO allies to “go get your own oil,” and declared that securing the Strait is “not for us.” He said that the responsibility for keeping the passage open rests with countries that rely on it.
But the United States relies on it. It’s only a geopolitical illusion that Americans are insulated from the effects of the closure of the Strait because we are net energy exporters. Our economy — built on cheap plastics, global logistics, and affordable food — is inextricably tied to that narrow stretch of water.