New York, New York — The Strait of Hormuz, a major shipping lane connecting the Persian Gulf and the Gulf of Oman, has been at a virtual standstill following the United States and Israel’s joint strikes on Iran late last month.
One of the most critical passages for global energy markets, the strait handles nearly 20% of the global oil supply and 20% of the world’s liquified natural gas.
As oil prices continue to shoot up at breakneck pace and with no clear end to the war in sight, some countries are scrambling to find new sources outside of the Gulf, including Caspian nations, Scandinavia, North Africa and even Latin America.
And while some LatAm oil producing countries like Brazil could stand to prosper from increased exports, other non-oil rich countries may have a harder time competing for energy in an increasingly expensive market.
Brazil, Guayana could have most to gain in oil sector
Brazil, the region’s largest oil producer at around 4 million barrels per day, is already exporting upwards of 3 million barrels per day and has limited short-term capacity to increase. However, according to the nation’s energy expansion plan, production could rise to 4.4 BPD or more in the coming years.
With many countries, especially in Asia, searching to fill gaps in their supply, Brazil could stand to gain from oil exports.
Cristiano Pinto da Costa, president of Shell Brasil, called the U.S.-Israel-Iran conflict an “enormous opportunity” for Brazil to attract investment, citing the country’s geopolitical stability and reliability as a producer.
Shares of the country’s state-owned oil company, Petrobras, surged on the Monday following the strikes.
According to Matt Smith, lead oil analyst for the Americas at commodity intelligence firm Kpler, for Brazil, it’s less about increasing production and more about redirecting barrels away from the U.S. and towards higher-paying Asian markets — something it was already doing before the strikes.
“We’re seeing Brazil already going gangbusters in terms of production. It’s basically at a record,” Smith told Latin America Reports. “And so what we may see is those barrels being pulled away from other countries to Asia instead.”
He pointed out that the shift in markets was already underway before the war, with over half of Brazil’s oil exports destined for China, as well as an uptick in shipments to India.
Diego Rivera Rivota, an energy researcher at Columbia University’s Center on Global Energy Policy, cautioned that it may not be all upside for Brazil however.
Any gains during the crisis are likely temporary, he explained, saying, “When you’re in crisis, I guess any volumes are useful. But can [Brazil] compete with the humongous series of volumes that flow through Hormuz to the Asia Pacific? I don’t think so.”
And while Petrobras may benefit from the crisis’ windfall, the macroeconomic picture is more complicated.
El País reported that food costs could go up as Brazil’s transportation is largely truck-based and its agricultural center is heavily dependent on imported fertilizers tied to natural gas prices.
“Probably the balance sheet of Petrobras and other companies would look heftier. But the balance sheet of, you know, maybe some food distributor or supermarkets or other companies would not feel the same way. It’s very hard to balance that as a society,” Rivera told Latin America Reports.
Another South American country, the small but oil-rich Guayana, could also stand to benefit from the Strait’s closure.
Oil production has been growing rapidly, with new crude streams coming online that are beginning to reach Asian markets.
Smith noted, “As we’ve seen Guyanese production continuing to increase as they’ve added new crude streams, we’re starting to see some of these barrels heading to Asia. This developing situation is definitely going to pull more Guyanese barrels into Asia.”
The Venezuela question
With the world’s largest proven oil reserves, Venezuela naturally comes to mind during a global energy crisis.
But crumbling infrastructure means the country produces only a fraction of its potential, currently about 1.2 million barrels per day. Even so, rising prices could deliver the country significant revenue.
Alejandro Grisanti, director of Ecoanalítica, told El País that Venezuela stands to receive about $400 million for every additional dollar in the average crude price.
The U.S. abduction of President Nicolás Maduro on January 3 and the subsequent appointment of acting President Delcy Rodríguez have raised questions about how much control the U.S. has over Venezuela’s oil flows.
Before the intervention, Venezuelan crude allegedly flowed primarily to China through sanctioned shadow fleets. Since January, flows to the U.S. have increased significantly under supply arrangements involving trading houses such as Vitol and Trafigura.
Smith described a potential tug-of-war emerging between Washington and Beijing over Venezuelan barrels.
“In recent months, we’ve seen Venezuelan crude, which had previously all gone to China, is now mostly going or starting to pick up to the U.S.,” Smith said. “You’ve got these trading houses, which are basically not discerning in who they sell that crude to. So if China’s going to come back into the market and is willing to pay the most for it, then it will head in that direction. But if we started to see some massive pick up in those flows back to China, there may be some response from the U.S.”
Rivera approached the scenario with more skepticism, saying he would find it “very hard” for trading houses to sell Venezuelan oil to China without “the approval, so to speak, or blessing of the U.S. administration for the specific case of Venezuela.”
Consumers take the hit
Elsewhere in Latin America, countries that import oil products could see costs go up for consumers if the war doesn’t de-escalate.
Rising liquid natural gas prices could also feed into inflation, especially in countries like Brazil, where goods are primarily moved by truck rather than rail.
Because so much of the food, merchandise, and manufactured goods are traveling by road, rising fuel prices would ripple across consumer products. If sustained, Rivers warns the shock could “mean a lot of inflationary pressure.”
Chile is particularly vulnerable. Rivera described it as “a major importer in the region which imports the bulk of its consumption, both in crude and in oil products.”
Just hours after the first U.S. strike, the Chilean peso weakened by about 14.8 pesos against the dollar, reaching 886.8 pesos per dollar.
Central American and Caribbean nations face an even greater exposure.
“For some of them, they use oil products not only for transportation, which is pretty big, of course, but also for power generation,” Rivera said. “So they have a sort of double whammy on that price pressure.”
He noted that while some of these countries may be shielded by long-term contracts, many others, such as Jamaica, the Dominican Republic, and Nicaragua, rely heavily on the spot market and will be immediately exposed.
The extent to which Latin America countries will feel the impact of the war in the Middle East will depend on how it develops and how long it lasts, according to the experts.
Rivera said the crisis has pushed the world into “an absolutely unprecedented” and “nightmare” scenario, warning that if the conflict persists, the world could face “an energy crisis of major proportions that we probably haven’t seen in our lifetimes.”
While some major oil and gas producers could stand to see windfall gains, he maintains that the broader economic consequences, inflation, and major trade disruption, outweigh any ‘benefits’.
“The negative impacts seem to outstrip the possible wins,” Rivera concluded.
Featured image: Strait of Hormuz via Wikimedia Commons
