Ridding the World of the Islamic Republic Price Premium
Opinion: The following article is commentary and its views are solely those of the author. This article was first published the 16th of March via The Angry Demagogue.
There has been much chatter about what “victory” over the Islamic Republic means and it is mostly an attempt to deny the very concept of victory. We wrote about “The End of Defeatism and a Return to Victory” last week where we criticized the whole aversion to victory in Western society. The naysayers don’t like to admit that an anti-Western regime can be all that bad, and therefore endless diplomacy needs to be a goal until the final surrender of the West. They don’t really care about the cost of gasoline in the United States – they actually want it to rise – but as long as it was brought up, let us examine in part, the cost of the Islamic regime and what “economic victory” will look like.
Victory in WWII meant not only the defeat of the evil that was Nazi Germany, but it also meant the resurgence of Europe as an economically successful continent. The Marshall Plan that was the crux of the European revival was as much a part of the Allied (sans the Soviets) victory as the surrender signed by German generals.
What is “economic victory” in this war? The media is all over the costs of the war, but no one has examined the costs of allowing the Islamic Republic to continue as it is. No one has examined the cost that the mere existence of the Islamic Republic (as opposed to non-Islamic Iran) creates for the world in general and the United States in particular.
Let’s start first with the most talked about and panic-ridden event and that is the Strait of Hormuz, the gateway to the Persian Gulf and a chokepoint in international shipping to and from that region. It is the gateway to much of the oil shipped to the world, but also fertilizers and other products. The Wall Street Journal news section in another ignorant headline it considered a “scoop”, wrote that President Trump was told that the Straits might be closed in case of war and he attacked anyway. I am not sure there is a knowledgeable military or diplomatic figure or layman in the world who didn’t consider that an option, but to the WSJ news editors it was the surprise of the century.
As Condoleezza Rice said on the recent episode of Hoover Institutions “Goodfellows” a 50 cent rise in gasoline prices for a few weeks is not a reason not to attack a country who has been at war with you for 47 years. But before we even get to that point, has anyone analyzed the cost of giving Iran a veto over who gets to ship through those straits?
If we look at the insurance rates for shipping through the Strait of Hormuz from Lloyds of London we will get a first hint. From 1970-1979 (before the Islamic Republic) the typical premium was 0.01-0.05%. Once Khomeini took power the rates were 0.05-0.2%. During the Iran-Iraq war when there were the “tanker wars” (between 1984-7) those rates jumped to around 5% with a peak of 7.5%. The post Iran-Iraq and Gulf war period of 2004-19 ranged from .0.05-0.25% – well above the pre-Islamic Republic days.
As for absolute figures, a tanker valued at $200m with a rate of 0.01% (pre-Islamic Republic) cost $20,000 and .05% will cost $100,000. The cost at 0.5% is $1million. So, the pre-Islamic republic rate for a $200m tanker ranged from $20,000-$100,000 while the absolute rate at the lowest level since the Islamic Republic came into existence ranged from $100,000-$400,000 – during the best of times. This does not take into consideration the war premium for the many years Iran threatened and even hit tankers even without the excuse of American or Israeli bombing. The average “war premium” from 1979-2020 was 0.83% or $1.66 million for a $200 million vessel.
We don’t have the wherewithal to continue this analysis, but this is exactly the type of article that we used to expect from the pre-ideological WSJ (or even NY Times) news sections. Maybe some economist or even the WSJ editorial page can start to do the heavy lifting and tell us how much the Islamic Republic of Iran has added to the gasoline bill of the average American even during non-war periods.
In economic terms – victory means a eliminating the price premium for shipping energy and global trade in general brought on by the very existence of the Islamic Republic. We will know victory is here when there is a return to the insurance premiums of the pre-Islamic Republic days and when the price of oil, due to increased supply from a non-terrorist Iran reaches the levels it is capable of. A 50 cent or even a 1 dollar rise in gas prices for a month will be followed by $2-3 decreases permanently. We won’t reach the 28 cents a gallon I remember from my childhood (actually 27.9 cents), but neither will it be $4.00 (except maybe in California).
This economic victory will reverberate to other theatres. While the Russians might profit from a temporary rise in oil to $100 a barrel, in the medium and long term, if oil drops to $40 a barrel or even less, they will struggle to support the war effort.
The short term costs and dire predictions that the journalists and diplomats have foisted upon us will end up being a drop in the bucket after economic victory is achieved.
Disclaimer: the views expressed in this opinion article are solely those of the author, and not necessarily the opinions reflected by angrymetatraders.com or its associated parties.
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