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Perhaps the biggest shock from the closure of the Strait of Hormuz at the end of February has been the lack of understanding displayed by the western political class. Insofar as there has been a sense of crisis at all, it has been solely viewed through the lens of financial markets, with governments foolishly and short-sightedly drawing down strategic oil and fuel reserves to hold oil futures prices down. But with the last of the tankers to leave the Gulf before the closure now unloaded, the growing gap between the artificial futures price and the – currently $38 higher – price of real time oil will soon close, causing a far bigger financial crisis.
By that time, however, based on what is currently happening in Asia, oil and fuel shortages are likely to be emerging here in Europe and the UK. As shortages have arrived, Asian states have been forced to adopt demand-side management measures (beyond price) such as mandating home working (Bangladesh, Pakistan, Sri Lanka) curbing air conditioning (Cambodia, Bangladesh, Sri Lanka) and speed restrictions and licence plate driving days (Myanmar, South Korea, Pakistan). The loss of natural gas has also caused Japan and South Korea to revert to coal-fired electricity generation.
With the Strait of Hormuz still closed, and with no sign of an end to the conflict in sight, it is only a matter of time before similar measures have to be adopted here too. And for this reason, government use of strategic reserves to hold prices down is positively homicidal – it means that essential diesel fuel (75% of which has to be imported in the UK) is being burned frivolously today when it is likely to be needed for maintaining critical infrastructure and ensuring at least some food deliveries later in the year. Indeed, a competent government would have introduced diesel fuel rationing months ago when there were still reserves in the tank… but then again, it has been many decades since the UK experienced competent government.
There is a deeper threat to our life support even than the coming fuel shortages though. So that, by the time the political class begins to glimpse the enormity of losing critical transport and agricultural fuel, an even bigger fracturing of supply chains will be overwhelming them. This is stage two of the crisis, in which oil, gas and various other chemical products locked up in the Gulf translate into supply shocks on a scale never witnessed before.
This is because of the high degree of interpenetration and complexity of our globalised economy. And given what is about to unfold, it may seem frivolous of me to draw your attention to a Japanese company making something as discretionary as crisps. Calbee has changed its packaging from colour to black and white in response to a massive hike in the price of ink across Asia – black ink being cheaper than colour. The reason is that ink is made from naphtha, a by-product of the oil industry. And while there has been some suggestion that Calbee may be using the change to raise publicity, companies around the world will be weighing similar decisions as they face both rising costs and real shortages.
For the UK, which is highly dependent upon imports, Calbee’s response should be taken seriously because they are unlikely to be the last Asian firm to have to change their processes or even cease exporting entirely. Last month I drew attention to how highly exposed the humble British cup of tea is to the growing energy shock, with the UK importing over 50 million kilograms of Kenyan tea every year. That tea crop relying on some 145 litres of diesel per kilogram along with up to 400kg per hectare of fertiliser to produce. With shipping fuel shortages looming, even if the tea could be produced, it may not get to these shores… and if it does, it will be at a much higher price. Not that we will be that concerned about tea by then, because Kenya (along with Egypt and Morocco) is also a major grower of the UK’s out-of-season food imports, the loss of which will result in absolute food shortages in conjunction with the inevitably higher food costs.
Nor is the coming food shortage the only threat facing us. As Asian economies are forced to slow or shut down their production lines, imported goods that we have taken for granted will cease arriving in UK ports in the autumn. The Philippines – currently the worst-hit Asian economy – for example, supplies the UK with electronics, telecommunications equipment, and grid electrical equipment and transformers. Pakistan – also hard-hit – provides us with rice and cereals, high volumes of clothing, and specialist medical and surgical equipment. We import medication and scientific instruments from Singapore, and a huge volume of generic pharmaceuticals from India… all likely to be impacted by the growing shortages of exports from the Gulf.
In this respect, we are in the process outlined in the fourteenth century poem:
“For want of a nail, the shoe was lost; For want of a shoe, the horse was lost; For want of a horse, the rider was lost; For want of a rider, the battle was lost; For want of a battle, the kingdom was lost, And all for the want of a horseshoe nail.”
The problem with globalised complexity being that we cannot see in advance where the nails, shoes, horses and riders are… we only find out how important they were when they are no longer available. And by that time, we will be in a cascading collapse as the failure of any part of our critical infrastructure rapidly impacts its neighbours so that the entire physical system becomes unsustainable.
To be clear, the only defence against Stage Two is to prevent it happening at all. That means not doing anything so idiotic as forcing the closure of the Strait of Hormuz. And for Europe it means not compounding the predicament by voluntarily disconnecting the continent from cheap Russian oil and gas. But insofar as that lunacy has already occurred, the very best that can be hoped for is a quick reopening of the Strait (and perhaps a conciliatory phone call to President Putin). Which will at least limit the disruption to supply chains which has already begun to perhaps the next five to ten years. Even then, the ‘new normal’ that follows is going to be a lot less material and far less globalised… and most likely with a much-reduced human population.
As you made it to the end…
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