President Donald Trump's administration has become increasingly confident it has eroded Iran's ability to constrict energy flows through the strait of Hormuz, but the high price of those efforts — both economically and militarily — is calling into question its long-term viability.
"We now have more oil flowing through the strait than at any point by far since the conflict began," Trump told a group of Mideast Gulf diplomats assembled in New York on Tuesday to hear his vision for bringing the conflict with Iran to a swift conclusion.
But Trump also told the group that progress on resolving the conflict can wait until after the 3 November US midterm elections, meaning more months of turmoil in what had been promised to be a short conflict.
While crude prices have fallen this week, refined products prices — particularly diesel — are reaching record highs in many markets around the globe. The high costs to consumers has some countries considering more subsidies, and has even spurred the US administration to consider a ban on diesel exports.
The US military is spending at least $3bn a month at the current rate of hostilities with Iran, the non-partisan Congressional Budget Office estimated last week. Most of the US efforts are going into enforcing a blockade on Iranian ports and extending protection to ships passing through the strait on the southern route near the coast of Oman.
"The costs of sustaining US active defense of a southern export route are high, but many of those costs are obscured and shifted to the future," Joshua Tallis, research program director at the Center for Naval Analyses, told Argus on Tuesday. "Delayed maintenance, extended operating hours for ships and aircraft, higher use of reservists — these are all bills that will incur real costs for the military."
But the US does not need to lift oil exports through Hormuz to pre-war levels to be able to claim success, said retired General David Petraeus, a former CIA director, at the Concordia Summit in New York on Tuesday. The US would only need to ramp up regional exports to around 16mn-17mn b/d — about 80pc of pre-war levels —due to demand destruction and alternative sources of crude such as the US and Venezuela, he said.
The US' ability to prevail over Iran "... depends on whether or not we can facilitate the supply of crude out of the strait and the other bypasses to get the crude market back in balance," Petraeus said.
US officials have in recent weeks been emphasizing the need to reduce reliance on Hormuz for energy exports, an idea challenged by countries in the Mideast Gulf, including Qatar.
But following attacks that shut down the East-West pipeline, restricting exports from the Red Sea, Saudi Aramco is now expected to send at least 56mn bl of crude through the strait of Hormuz during September and October, increasing reliance on the waterway despite heightened security concerns.
But even if more crude flows through the strait, the costs will remain high. The ongoing security risks and a limited pool of vessels available to transit Hormuz have pushed the rate for a very large crude carrier to move Middle Eastern crude through Hormuz to Asia to $34.31/bl on 18 September, its highest level since Argus began assessing the route in November 2016.
