Here’s a very interesting detail about risk, economics and military power that is kind of under the headlines in the expanding U.S.-Iran War. Iran is in a very, very bad position. Its military and deterrent power have already been badly damaged over the last three years. And it’s facing the top regional military power (Israel) and the top global military power (the U.S.) at the same time. It’s best bet to bring the war to a stop is to create huge international pain, and the best way to engineer that is to throttle oil deliveries from the Middle East, specifically by threatening shipping through the Strait of Hormuz.
The U.S. and the U.S. military say they’re committed to keeping those shipping lanes open. They can do that through a mix of destroying Iran’s ability to fire missiles and drones and by escorting tankers through those waterways. The problem is that the U.S. military can’t force this matter. It comes down to tanker owners’ appetite for risk. Iran only has to be successful a few times, or convince the world it is able to be, to shut off shipping. The U.S. can do whatever it wants but unless those shipping owners think there’s very, very little risk, they’re not going to send their ships through. It’s this very interesting and highly consequential conflict between military standards of risk and private-sector standards. To drive the point home about private-sector risk appetites, shipping insurers or at least most of them, announced a few days ago that they’re not insuring ships on that passage for now. No insurance, probably no shipping.
Now the U.S. has stepped in and says it will backstop all that risk. It’s not totally clear to me whether it’s to the insurers or the shippers or who. And that’s because the U.S. actually hasn’t been very specific on how it’s supposed to work. But I want to point your attention to this article from CBS News which explains what’s known about the offer. What jumps out to me is how improvised and slipshod it seems. It also potentially puts the U.S. on the line for huge payouts to global oil shippers. In any case, read the article. It’s very interesting. It points to one of these wrinkles in a big momentous story that is going to have a big role in how everything plays out and yet is only getting under-the-fold attention. In this case it certainly seems like the White House has come up with a very half-baked plan to deal quickly with a situation that was entirely predictable. They can’t have global oil supply lines break down on them because of, among other reasons, the fact that it will create global inflationary pressures and make the domestic political situation for the White House even worse than it is. I don’t know nearly enough about maritime insurance markets and/or the shipping industry to know if it makes much sense. But presumably the insurance and shipping industries do and they seem to be saying it’s not ready for prime time. Read the article.
