Iran's (probably) hollow threat to close the Strait of Hormuz is a danger that has long faced the oil-consuming world. The 34-mile wide strait offers a strategic chokehold on the Persian Gulf, and Iran appears to have the upper hand in controlling it. In my (as yet unpublished) book Trust Me, I painted a picture of what would happen if Hormuz were closed after an Iranian missile strike on Israel:
Almost 40% of the world's seaborne oil supply goes through the Strait of Hormuz, around 15 million barrels per day. The loss of this oil on the open market, even for a day or so, would send prices even further through the roof. The traders were ready. If the Strait was closed, they would hold and profit. If it didn't they would sell tomorrow morning - and still profit. There was bound to be a bit of a panic in the Asian and European markets when they opened. Oh, life was sweet! Oil markets love a good disaster.
Although Trust Me is fiction, I have drawn a fairly accurate portrait of the oil trading community. Oil is a scarce, highly desired commodity, making it a magnet for traders.
Even at today's prices oil is an extremely cheap source of energy. The reason that prices have been rising gradually but doggedly for the past 30 years is because developing nations need more and more oil to power their cars and factories. But because it comes from countries where democracy is a pipe dream and despots and dictators treat oil reserves as their personal 401K's, it will not remain cheap. From the smallest coup to the most outrageous missile strike against a neighboring country, many of the producing countries' instability is palpable, Every ripple reflects in the price of oil, making the market easy to hype and to spook.
Add to this general uncertainty the snail's pace of refinery development in the western world, and we will see refined products such as gasoline and diesel become increasingly more expensive as demand rises. In fact, the refinery count is decreasing in certain countries. In the US, few permits to build new refineries make it past the environmental lobbyists or local residents. One old, but still productive, 145,000 b/d East Coast refinery owned by Sunoco is slated for dis-assembly to be taken lock, stock and smokestack to India.
Conoco Phillips shut its 185,000 b/d Trainer, PA refinery in September, and Sunoco closed the 175,000 b/d Marcus Hook, PA refinery recently. That effectively removes over 500,000 barrels of refined product per day from the US East Coast market - nearly 3% of daily US consumption.
In Europe the largest independent refiner, Petroplus, has had such terrible margins that its $1bn line of credit has been cut off. It will be tough for it to buy crude to refine if it survives, and even tougher for it to find buyers for its five refineries in this climate if it doesn't.
If there is anyone out there who does not believe that oil prices will stay over $100 a barrel, and probably rise to nearer $200, then they are delusional. And gasoline, jet, diesel and heating oil will rise disproportionately more. Get ready for $5.00 gasoline.