How the Iran War Affects More Than Oil

Fractal mathematician Benoit Mandelbrot once told us that the coast of Great Britain is much longer than we think. From a distance, it appears to be a smooth curve. However, an increasingly closer look reveals countless coves, crannies, and indents that make it much longer:

Similarly, at econlife, we’ve looked at how the Iran War’s impact included oil and fertilizer.

But a close look reveals so much more.

The Iran War’s Economic Impact

A Bloomberg Odd Lots podcast took me on a “marine chaos” tour. They touched a slew of topics about the Iran War’s impact.

Insurance

Today, war insurance for vessels in the Persian Gulf is especially relevant. The policies that cover the vessel or the cargo have a war insurance clause. The catch here is that typically, the clause has a short notice cancellation option (2-7 days) that insurers would have already exercised. As a result, most shippers will need to rebuy war insurance. This time though, it will be much more expensive. They also have to decide who will pay–the ship owner, the charter company, the cargo owner are possibilities. At that point, even if they were willing to pay the high price, insurance might not be available.

And, we have not even mentioned liability for loss of life. Hit by an unidentified projectile during the past week, a relatively small cargo vessel’s crew abandoned ship rather than fighting the flames.

Aluminum

With aluminum, the disruption affects the raw materials like luminah flowing in and the finished product going out. As a result, Emirates Global Aluminum said they would fulfill orders from stockpiles elsewhere in the world. The UAE could also have shipped through its border on the Gulf of Oman but it too was risky.

I drew the arrow showing the Gulf of Oman. You can see a sliver of the UAE touching it:

Diesel

With oil up, we have pricier diesel and the fuel surcharge clauses that can kick in. As a result, North American barge freight, truck freight, and rail freight will be hit–affecting countless products heading for consumers. But it’s the truckers that are most vulnerable.

New Routes

The vessels that avoid the Persian Gulf will have to take a longer route. The extra time, extra fuel, extra labor will be expensive.  The only happy people could be the fuel providers near the southern tip of Africa.

So, where are we? It all adds up to supply chain disruptions.

Our Bottom Line: Externalities

Disruption always takes us to externalities. When patterns or agreements between two parties affect others not connected to them, we have an externality. Pollution creates negative externalities while vaccines produce a positive ripple.

Certainly a strategically located choke point and a war create a ripple of countless externalities.

My sources and more: Thanks to my Odd Lots podcast for inspiring and providing all of the facts for today’s post. From there, we needed to confirm the abandoned vessel.