Every business particularly in the commodity-based industries there is a conflict, the higher the price that is good for the business producing the commodity, but not necessarily good for those who indirectly consume it. In the last month, the US started and a war with Iran for a variety of reasons, none of which has been well articulated. One of the many consequences is oil prices went up because Iran has large reserves of oil and gas and with a war it stops.

Another consequence of the war is geography; Iran is on one side of the Strait of Hormuz which is about 30 miles wide. The issue is 20% of the world’s oil and gas tankers need to go through the Strait. If the Strait is closed, no ships go through, if no ships go through, the producing countries have to store the oil, when the storage facilities are full, they producers have to stop production. If they stop production, it will take weeks or months to get back to normal.

The number 20% is stated in the media, but what does it really mean? Oil is measured in barrels and the 20% is equivalent to 18 to 20 million barrels of oil a day. Most of the oil from the Middle East goes to China and other Asian countries. If they do not have enough oil, production of goods will decrease.

In an article by Jeffery Jones and Emma Graney of Reuters, the International Energy Agency own storage facilities for oil they hold in reserve for their member countries. The IEA agreed to release 400 million barrels of oil which sounds good, but there are considerations.

Jeff Currie of Chief Strategy Officer of Caryle Energy Pathways, discussed the flow rate that can be released per day is about 2 million. The world needs 20 million which means they are short. In addition, 400 million divided by 2 million is 200 days. The IEA helps but it is not nearly enough.

In the US, Energy Secretary Chris Wright talked about expanded production in Venezuela (but experts predict that will take 10 years. He also talked about the US Navy which the 5th Fleet is headquartered in Bahrain would escort ships through the Strait of Hormuz and then had to walk it back. (the easier solution is to negotiate with Iran, remove sanctions and let the oil flow to Asia.

As a result of these actions, the commodity oil has increased, because oil and gas is used in many products in the economy, it will quickly have a ripple effect on higher prices. The easiest one to see is gas prices at the pump, but spring is coming which means farmers need fertilizer, that will go up in price. will the price of the crops go up? Food prices will rise at some point and the list goes on.

If you are an investor in airlines, after planes, the biggest cost is airline fuel, the cost went up. More people were flying which is a good thing, it will quickly become more expensive to fly. If you want to see an interesting chart is flights over Iran before the war and the day afterwards. Many airlines flew over Iran, they have to go around it which means higher energy prices because they will use more fuel.

Linking to dividend paying stocks, there used to be a saying about 6 degrees of separation meaning it does not take long before many things are interconnected. The world somehow balances one and if you let one part of the equation lapse, others will suffer. This is when you have to ask can the companies you invest in pass on their higher costs to the end user?

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