A number of years ago, Russia invaded Ukraine and the western world-imposed sanctions on Russia, for a wide variety of issues, including what Russia might do if they took over Ukraine. The war has been going on and the sanctions have remained. Then the US invaded Iran which sent up oil prices because of where Iran sits in geography. Iran borders the Persian Gulf and the Gulf of Oman which is connected by the Hormuz Strait. The Strait is about 30 miles across, but Iran covers the eastern side of the gulfs while countries such as Iraq, Kuwait, Saudi Arabia, Qatar, the UAE are on the other side. All those countries are rich in oil and gas and for decades the way to move the oil and gas was pipelines to the Persian Gulf and load the oil and gas onto tankers to go around the world.

The logistical problem is the Hormuz Strait, whoever controls the Strait controls the tankers. All the countries use the Gulfs to move goods around the world and 20% of the world’s oil goes through the straits. Most of the oil and gas is being sent to Asian countries including China and Japan as well as India and Europe.

When President Trump invaded Iran, this set up an unintended consequence. It was expected during the conflict, Iran’s production would drop, but the problem is the tankers stopped moving which meant the producing countries had to store the oil and gas and when the storage facilities were full, they have all cut production.

President Trump has proposed a number of solutions including the US Navy providing assistance to tankers, the US International Development Finance Corporation (DFC) providing insurance to the owners of the ships However, logistically how many ships could the US Navy cover as they move thorough the 30 mile Strait of Hormuz?

The US Department of Treasury has come up with a solution, it will lift sanctions on Russian oil and gas and allow Russia to sell to India for 30 days.

In the meantime, the President of Russia has told Europe that if it removes sanctions, it could buy Russian oil and gas.

The problem is Russia has some of the world’s largest reserves of oil and gas, if it sells to Europe and India which they were doing before it invaded Ukraine, the Russia will have money in the bank account. The war with Ukraine has meant Russia’s bank account has suffered, it has drawn down reserves to pay for the war and the economy is not doing is essentially in recession. Selling the oil and gas reverses the situation and allows the war with Ukraine to go on.

Treasury Secretary Scott Bessent said the 30 day period would only apply to Russian oil stranded on tankers after no customer could be found. In the oil business, companies fill tankers and they are dispatched without an end customer, they are the shadow market of the business. Customers know about the oil and often it goes to refineries at a discounted price, so there is incentive to keep the shadow market operating.

Analysts believe that the shadow market for Russia would be 125 million barrels of oil.

Prior to the war with Ukraine, oil and gas was easily 20-30% of the Russian budget.

Linking to dividend paying stocks, government policies are supposed to be based on principles but if you are a student of government politics, those principles seem to be malleable under pressure for the world circumstances.

There are more questions than answers, till the next time – to raising questions.