Aggravation Game: Why the US Win In Case Iran Blockades Hormuz Strait?

The Hormuz Strait closure by Iran will mainly benefit US oil companies and defense industry. The action will spark a crisis that would make easier to find a solution to the US economic woes and even create an opportunity to curtail its huge external debt.

The USA puts pressure on their European allies to stop oil imports from Iran to make it abandon the nuclear program. In case the sanctions enforced, the Teheran’s leadership promises to respond by blocking the Strait 45% of sea oil traffic goes through. There is not a single evidence Iran is on the way to go nuclear. The US has been accusing Iran of nuclear ambitions for years without any evidence. It makes one remember Saddam Hussein, then Iraqi leader, who was accused of the possession of weapons of mass destruction (WMD). The result is known — the USA occupied Iraq, no trace of WMD was found.

And there is Pakistan — another Muslim nuclear state situated in the vicinity. There were times Pakistan was a US ally. Now those days are gone, the Pakistani army and special services directly confront the US army. In this case why the USA brings no charges against it, while rapidly increasing its naval presence in the immediate vicinity of Iran instead? The answer may seem to be paradoxical and shocking, but it has solid economic substantiation. The Hormuz Strait closure by Iran will mainly benefit US oil companies and defense industry. The action will spark a crisis that would make easier to find a solution to the US economic woes and even create an opportunity to curtail its huge external debt.

Hormuz Strait map

In April 2011 I wrote that since some time high oil prices became a burning issue. The economists argue if the trend is to stay and, if that is the case, will it ignite a new world crisis? When the US led NATO operation in Libya started, many observers were perplexed for the US was already involved in two wars (Iraq and Afghanistan) by the time. It makes one remember the Barack Obama promises to change the aggressive George Bush’s policy and pull out troops from Iraq at least. Those were the words he said during his election campaign that led him to victory. The US escalating foreign debt has already exceeded $ 14 billion and keeps on growing. No wonder, any war is a very costly endeavor.

In reality there is a rather simple way to explain it. The “Cold war” over, the USA didn’t cut its military budget but rather made it go up. Now the US defense expenditure exceeds what all other countries of the world spend together. But once produced, projectiles and missiles are to explode (otherwise the warehouses storage capacities will be exceeded). A large part of the US civil industry sector has been transferred to Asian countries with cheap labor (first of all China).

It made possible to sharply increase US corporations share holders and top manages revenues. As a result the defense industry presents a great share of the US industrial production capability and the attempts to curtail military budget meet lobbyists resistance, working places cuts used as a spook. The defense industry leaders cannot outsource the production (because of possible secret information leaks). They don’t want it actually for arms sales to the state mean great profits.

But why take military actions in the oil rich Middle East and North Africa, something that irreversibly causes oil price hikes? There are a few reasons why. Firstly, the US GNP energy consumption goes steadily down due to the very same outsourcing. Stock market traders activities need less energy than production of household goods. Secondly, price hikes serve the interests of oil producers operating on the US and neighboring Canada’s soils.

North America is rich in “heavy oil” and oil sand. Development of deposits is effective only in case the price stands at not less that $ 100 a barrel. Thirdly, the Middle East destabilization gives the USA a powerful leverage over big oil importers: the European Union, China and Japan. In the given case their energy security will depend directly on US military success. By the way these are the very countries the US owes trillions of dollars to.

Reason N1: Blockade of Iran and shale oil and gas deposits development in the USA

The Hormuz Strait closure by Iran means an end to oil and gas supplies coming from Saudi Arabia, Bahrain, Iraq, Qatar, Kuwait, the United Arab Emirates. It results in deficit and steep price hikes. It may not happen, but still talking about it, the escalation of stand off and mutual threats boost the hikes trend. Under the conditions the development of American hydrocarbons, that are normally hard to extract, becomes a very lucrative business. The US and neighboring Canada’s territories are rich in hydrocarbons. But only high oil prices (no less than $ 100 a barrel) justify their development. It’s shale oil and gas mainly, then oil sands. The US has abruptly increased the shale gas domestic production and, as a result, practically stopped importing liquefied natural gas (LNG).

Qatar, the leading world LNG producer, had to make its tankers sail to Europe and Asia, many a time selling the gas cheaper than the competitors, who worked under long term contracts. But the overabundance of supplies led to prices collapse, they have just gone below the $100 a 1000 cubic meters level. And an average shale gas production price remained by and large the same 150 dollars per 1000 cubic meters. The way out for US companies was credits from the external investors and increase of shale oil production while the prices still remained high.

The shale oil and gas development is one of major directions of real economy progress in the US. The shale gas extraction will create 870 thousand jobs till 2015 and add $ 118 billion to the US GNP. This forecast was offered by IHS Global Insight analysts presented by Bloomberg agency. The Natural Gas Alliance ordered report says the sector enterprises will pay $ 933 in all taxes. As expected in the period of 2010 till 2035 the sector investment will be up to $1,9 trillion and capital costs will be $48,1 billion a year already by 2015. At present about 600 thousand Americans are employed there, by 2035 the figure will grow to 1,6 million. The shale gas share in overall US gas production has risen from 27% in 2010 to 34% this year. As IHS predicts the share will extend to 43% in 2015 and up to 60% by 2035. The shale gas production added $ 76,9 billion to the nation’s GNP with prospects to extend to $231,1 by 2035.

The shale gas production growth will inevitably be a factor for this type of fuel prices going down what will make every household save $926 in 2012-2015. By 2035 the disposable income will increase to $2 thousand. Shale oil added, the sector is to become a leading job creator in the country. Though ecological risks do exist. The extraction technology includes wide scale hydraulic fracturing, meaning 900-1000 tons of water injection into the rock to ultimately pressure gas out. In case of water only it would be something to reconcile with. But chemical reagents are added risking underground water contagion and potable water sources poisoning. Besides the pressured out gas disseminates underground out of control and quite often it gets mixed up with water. There have already been cases in the USA when gas and water mixtures that could be set on fire came from taps. Though the USA doesn’t tackle the ecology issues as carefully as they do in Europe, still shale gas extraction was forbidden in some parts of New York.

Reason N2: The USA will make Asia-Pacific nations pay for protection of sea lanes

The last 10 years the USA has been constantly decreasing Middle East oil supplies in favor of African and Latin American exporters. What about other major importers like the EU, China, Japan? Their economies depend to great extent upon shipping coming from the Persian Gulf. Obviously Russia is not able to abruptly increase world market supplies. Being the world leading gas supplier, gas supplies is an easier issue for it to tackle, still some time to boost production is required as well. Once Russian gas pipelines go only to Europe and Turkey, the rise in demand is expected there. Just the same happened when the pipeline connecting Libya with Italy went out of order. But the Asia-Pacific nations have only the US Navy to rely on when it comes to keeping the Hormuz Strait passage open for oil and gas traffic. The question is what price is to be paid to the US.

Actually the policy is quite predictable if you step into the US elite’s shoes. I mentioned in a leading Russian newspaper in December 2010 that the main US creditors were China and Japan. In its turn the USA is the leading military power. The US military budget exceeds the military expenditure of all other counties of the world. Navy is the main instrument of this might, the US naval supremacy is global. Lately US strategists publications started to let it drop the USA could get profit while protecting sea lanes. Now the question pops up — who among world leaders depends mostly on sea lanes? The answer is China and Japan. Their economies to great extent depend on sea energy and raw materials supplies.

First let’s try to see what options the USA has to sink its huge debt? Option N1 — to sharply raise taxes and cut expenditure. Neither common voters nor big business will ever support it. Option N2 — to start printing money and open the way to hyperinflation. Public indignation will sweep away an administration that tries it. Besides foreign creditors will refuse to be paid in depreciated dollars and will demand valuable assets in turn. Only military force could make them receive “greens”. Option N3 — bankruptcy. In this case the US foreign assets will be arrested. It’s the armed forces again who will have to defend them. Option N 4 — to make others shoulder the US armed forces expenditure. How come is it possible?

Imagine it’s not Somali pirates with small arms who attack cargo ships but terrorists equipped with rockets and torpedoes. No ransom demands, they will simply sink the ships, especially the ones going to China and Japan. The US will be willing to come to aid and fight the new threat but not for free, that goes without saying.

This option may seem to be a sheer fantasy. But who could imagine terrorists destroying the New York business center? And the US occupying Afghanistan and Iraq in response? By the way the history has a similar story. Everyone knows the USA joined the WWII after the Japanese attacked Pearl Harbor. But few know what was behind the Japanese decision. The Japanese leadership recognized well the US supremacy, but somehow dared to attack. In reality they had no choice. In September 1941 America blocked oil supplies to Japan. The Japanese had no deposits of their own and whatever they had in storage was to end in the beginning of 1943. That’s why the Japanese attacked Pearl Harbor in December 1941. The goal was to neutralize the US Navy and start to capture oil deposits in Asia.

Sergey Pravosudov is the Director of the National Energy Institute of Russia.

Source: World Intellectual Network

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    1. A closure would certainly add to the pressure on Syria’s border with a renewed push to ‘re-purpose’ the Trans-Arabian pipeline corridor:

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