Oil prices dropped about 2% on reports that the Trump administration had sent Iran a 15-point plan to end the conflict, and that Tehran would allow “nonhostile” ships to pass through the Strait of Hormuz. Brent crude oil dropped below $100 a barrel, a level it has been hovering around recently, only slightly higher than the average inflation-adjusted price since January 2001, around $95. President Trump’s energy dominance plan has made the United States the number one producer of oil and natural gas and a major exporter of both, somewhat insulating it from price spikes seen in other conflicts. For example, in March 2022, when Russia attacked Ukraine, Brent crude oil reached almost $140 a barrel, which would be closer to $160 today, factoring in inflation. Brent crude oil reached its historical all-time high of $147.50 per barrel in July 2008 due to peak oil fears, which would be about $222 with inflation factored in.
Trump’s 15-Point Plan
The New York Times, which did not see a copy of the plan, indicated that it addressed Iran’s ballistic missile and nuclear programs and discussed maritime routes. Iran has effectively blocked most Western ships from safely passing through the Strait of Hormuz, reducing the global supply of oil and natural gas by about 20% and increasing oil and gas prices.
According to the New York Times, Pakistan’s army chief, Field Marshal Syed Asim Munir, is the key interlocutor between the United States and Iran. He is believed to maintain close ties to Iran’s Islamic Revolutionary Guards Corps, putting him in a position to pass messages between the two sides. He recently reached out to Mohammad Bagher Ghalibaf, the speaker of Iran’s parliament and a former Revolutionary Guards commander, proposing that Pakistan host talks between Iran and the United States.
Iran Indicates Non-Hostile Ships Can Pass Through the Strait
Iran told the United Nations Security Council and the International Maritime Organization (I.M.O.) that “non-hostile vessels” may transit the Strait of Hormuz if they coordinate with Iranian authorities. Via Reuters, the note stated, “non-hostile vessels, including those belonging to or associated with other States, may – provided that they neither participate in nor support acts of aggression against Iran and fully comply with the declared safety and security regulations – benefit from safe passage through the Strait of Hormuz in coordination with the competent Iranian authorities.” Iran has “taken necessary and proportionate measures to prevent the aggressors and their supporters from exploiting the Strait of Hormuz to advance hostile operations against Iran,” according to the note, adding that vessels, equipment, and any assets belonging to the U.S. or Israel, “as well as other participants in the aggression, do not qualify for innocent or non-hostile passage.”
The New York Times reports that around 800 tankers are idling on either side of the strait, and 17 ships have been struck in the Middle East since the war began on February 28. Recently, a small number of ships have gone through the waterway, whose effective closure has affected oil and liquified natural gas shipments, particularly to Asia. Asian countries that depend on Middle Eastern oil and gas can send tankers through if they trust Iran’s assurances and obtain Iran’s permission.
According to Dimitris Ampatzidis, a senior risk and compliance analyst at Kpler, a maritime data firm, Iran’s letter is intended to signal to the I.M.O. that Iran has not imposed a formal blockade of the strait. The conditional nature of Iran’s letter, however, “introduces uncertainty, which is typically enough for operators and insurers to stay cautious.”
To offset disruptions in the Strait of Hormuz, oil exports from Saudi Arabia’s Red Sea port of Yanbu increased to nearly four million barrels per day. The Kingdom can move up to seven million barrels per day through its East-West pipeline, of which five million barrels per day are available for export. The other two million barrels per day are required for use by local refineries and power generation. Saudi Arabia has been using drag-reducing agents, friction-reducing chemicals that can boost flow rates by 30% or more, to speed up oil flows to Yanbu.
However, according to OilPrice, most oil exported from the Red Sea port of Yanbu is loaded onto Very Large Crude Carriers that are too large to pass through the Suez Canal, forcing them to transit south through the Bab el-Mandeb Strait, where they are vulnerable to Houthi drone and missile attacks. The risk has suppressed traffic through the Red Sea, with companies and insurers perceiving the transit via Bab el-Mandeb as “high risk.” Analysis from ship broker Braemar showed 33 Very Large Crude Carriers have lifted oil from Yanbu since February 28. Average tanker earnings for voyages from the Red Sea to Asia have increased to their highest in nearly six years, reaching nearly $270,000 a day.
Analysis
Because the Strait of Hormuz needs to be freed of hostilities to end the oil supply disruptions, President Trump’s 15-point peace plan is a good initial step. However, given that Iran “responded negatively” to the proposal and the U.S. has sent thousands more troops to the region, an end to the war still seems out of reach. Absent an end to the conflict, oil and gas companies in the U.S. and around the world will need to ramp up production, and politicians need to support this effort by removing regulatory and trade barriers.
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