Trump may have given Iran a $500 bln money spinner

PARIS, April 1 (Reuters Breakingviews) - When Donald Trump decided to attack Iran, he was probably not planning to hand the government in Tehran a money spinner that could be worth $500 billion over the next four or so years. But that may be what the president achieves if the United States withdraws.

A lot depends on whether Tehran keeps control of the Strait of Hormuz, through which about a fifth of ​the world’s oil and liquefied natural gas (LNG) transited before the war. The United States may manage to open the narrow waterway via negotiations or military force - or goad, opens new tab other countries to do so.

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On the other ‌hand, what the U.S. president calls a “lovely stay” in the Gulf is so unpopular with American voters that he may quit without restoring the free flow of tankers. Trump said on Tuesday he will finish the war in two to three weeks even if there is no deal, though he has regularly contradicted himself, and the U.S. has sent more troops to the region and threatened to intensify operations.

If Trump did withdraw unilaterally, Tehran would be able to formalise its embryonic toll system, opens new tab. Given the huge profits Arab states make from transporting oil and LNG through the chokepoint, Iran might extract $120 billion ​a year until the producers build pipelines to avoid it.

Iran has already charged at least one ship $2 million, opens new tab to transit Hormuz, according to Lloyd’s List. Before the war, around 150 ships travelled through the Strait each day, opens new tab. If it ​charged $2m per vessel, Tehran could collect $110 billion a year.

But a flat rate is too crude. It might make more sense to charge by the weight of the ship. That is ⁠what Turkey does, opens new tab for boats passing through the Bosphorus and Dardanelles.

Iran could even levy a toll related to the profit on the cargo. This could be attractive given the huge profits that Gulf Arab states make on their oil and LNG.

HORMUZ MATHS

Consider the ​maths. Before the war about 20 million barrels of oil went through Hormuz each day. Saudi Arabia can divert, opens new tab 7 million through a pipeline to the Red Sea while the United Arab Emirates can push 1.5 million through a pipe to the Gulf of ​Oman. Another 1.5 million is still coming from Iran. That leaves 10 million barrels a day trapped in the Persian Gulf.

Assume that the crude price falls back to around $60 a barrel – from around $100 on Wednesday - if the Strait reopens. Then subtract Gulf Arab countries’ production costs of around $5, opens new tab a barrel - before taking account of capital costs, which are sunk. On these rough numbers, the oil producers are losing $200 billion in profit for every year the Strait remains closed. Meanwhile, Qatar earned 187 billion riyals, opens new tab ($50 billion) in revenue from gas last year of which the vast majority was ​profit given its low, opens new tab lifting and liquefaction costs.

Iran will want to extract some of this $250 billion combined annual profit pool in return for opening Hormuz. Saudi Arabia, Qatar and others will want to hand over as little as possible. How the cake is ​split will depend on their relative bargaining strengths.

The Gulf Arab states will presumably argue that they are in no hurry to open Hormuz because they can rely on their large sovereign wealth funds to cushion the blow, whereas Iran is desperate for cash. By contrast, Tehran ‌may say it ⁠can take more pain than its neighbours - and every additional month that the Strait is shut will do long-term damage to Dubai, Abu Dhabi, Doha and Riyadh.

What is more, Saudi Arabia has 68, opens new tab years of reserves at 2024’s production rate. The world will probably have stopped using hydrocarbons long before those run out. So any crude it does not pump today could be money lost forever.

External actors could also influence the negotiations. The United States could say that any country which pays tolls to Tehran is contravening its sanctions. The problem is that if Hormuz stays shut, oil prices will soar - exactly what Trump wants to avoid.

Assume Iran and its neighbours split the profits equally, giving Iran $100 billion from tolls on oil tankers each year and perhaps $20 billion from gas.

The ​Gulf Arab countries would then have a powerful incentive to ​build pipelines. The fastest and cheapest route is to build ⁠more capacity to the Red Sea - though that would not guarantee free passage if the Iran-aligned Houthis once again disrupt shipping in the waterway.

The oil pipelines and associated port facilities could be built in three to four years, according to an industry expert. It might take twice as long to do so for more specialised gas infrastructure. In the midpoint of those ranges, ​Tehran could extract $350 billion from oil tolls and $140 billion from gas ones, or $490 billion in total, before the money spinner stopped rotating.

IRANIAN OPEC

All this maths is based on oil and ​gas prices falling back to where ⁠they were before the war. But what if Iran restricted flows with the aim of keeping prices high?

Arab countries have been worried that higher prices would encourage consumers to switch to other forms of energy. What is more, when the Saudi-dominated OPEC oil cartel ordered production cuts in the past, some countries pumped more than was agreed. That made all members reluctant to hold back output.

Tehran’s incentives might be different. If prices and profits were higher, it might be able to extract a bigger toll from the Arab countries. Given ⁠that the Hormuz ​money spinner would at best last a few years, it might not be too worried if consumers weaned themselves off oil. What is more, control ​of the chokepoint would enable it to police how much each state exports.

On the other hand, Iran has good reasons not to keep prices too high as that would upset powerful consumers around the world. The United States and, perhaps even European countries, might then feel they had no choice but to ​force open the Strait of Hormuz - however difficult that might be.

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Editing by Peter Thal Larsen; Production by Shrabani Chakraborty

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Hugo Dixon is Commentator-at-Large for Reuters. He was the founding chair and editor-in-chief of Breakingviews. Before he set up Breakingviews, he was editor of the Financial Times’ Lex Column. After Thomson Reuters acquired Breakingviews, Hugo founded InFacts, a journalistic enterprise making the fact-based case against Brexit. He was also one of the founders of the People’s Vote which campaigned for a new referendum on whether Britain should leave the EU. He was one of the initiators of the G7’s “partnership for global growth and infrastructure”, a $600 billion plan to help the Global South accelerate its transition to net zero. He is now advocating a $300 billion “reparation loan” for Ukraine, under which Moscow’s assets would be lent to Kyiv and Russia would only get them back if it paid war damages. He is also a philosopher, with a research focus on meaningful lives.

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