How commodities move: Chokepoints, embargoes and sanctions

4.1 A few narrow passages carry a large share of seaborne trade

The Strait of Hormuz is the only sea exit from the Gulf. Saudi crude from Ras Tanura, Kuwaiti and Iraqi oil, and Qatari LNG from Ras Laffan all pass it. Conway reckons that Qatar's North Field alone supplies about 4% of the world's energy, and Qatar shipped 30.5% of 2024 LNG export value. In the 1980s Iran-Iraq 'tanker war', the United States reflagged eleven Kuwaiti tankers in 1987 and escorted them with warships.

The Strait of Malacca joins the Indian Ocean to the South China Sea. Gulf crude bound for East Asia uses it, and its shores hold the palm oil ports of Indonesia and Malaysia, which shipped about 82% of 2024 export value.

Suez, with the Bab el-Mandeb strait at the Red Sea's southern end, is the shortcut from the Gulf to Europe: about 6,500 miles to Southampton against 11,000 round the Cape. In 1955 oil made up two thirds of the canal's traffic, and two thirds of Europe's oil passed through it. When Egypt blocked the canal in 1956 and Syria cut the Iraq Petroleum line, Kuwait's output fell by half because its oil could not move.

The Panama Canal links US Gulf grain ports with Asia, and its lock dimensions gave the Panamax class its name. When drought lowers the lakes that feed the locks, the canal limits draughts and transits. The Turkish Straits, the Bosporus and Dardanelles, are the only exit for Black Sea wheat, maize and sunflower oil. The 2022 closure of Ukraine's ports sent sunflower oil to its ten-year high of $2,361 a tonne until a negotiated corridor reopened them for a time.

The distinction that matters is between dead ends and shortcuts. Closing Hormuz or the Black Sea traps supply behind it. Closing Suez or Panama mainly lengthens voyages, absorbs ships and raises freight.

• Conway (2023), Material World · pdf pp. 276-278
• Yergin (1991), The Prize · pdf pp. 831, 856-858, 1313-1314

4.2 Embargoes leak because oil and grain are interchangeable

The 1973 Arab oil embargo is the classic test. Yergin describes two weapons. Arab producers cut output 5% from the September level and threatened a further 5% each month, and they banned all exports to the United States and the Netherlands, later adding Portugal, South Africa and Rhodesia. Available Arab oil fell from 20.8 million barrels a day in early October to 15.8 million in December. Other producers added 600,000 barrels a day, so the net loss was 4.4 million, about 9% of supply but 14% of internationally traded oil. The posted price rose from $2.90 in mid-1973 to $5.12 in October and $11.65 in December.

The targeted ban achieved much less than the general cut. The oil companies, caught between producing and consuming governments, adopted what they called 'equal misery': they moved Arab and non-Arab oil around the world so that every country suffered a similar percentage cut. Morgan agrees: the letter of the embargo was observed while oil kept arriving from elsewhere. Radetzki and Wårell generalise it. A selective embargo hurts its target more than others only if politics blocks reallocation; otherwise markets steer supplies towards the embargoed nations, and the cost is a higher price for everyone.

Grain embargoes leak too. When the United States cut off grain sales to communist countries, Canada kept selling them wheat, and the Cuban boycott cost Gulf Coast rice farmers a market.

Large physical disruptions are rare. Radetzki and Wårell count four in minerals over 40 years: Zairean cobalt in the late 1970s, oil in 1979-1980, Chinese rare earths in 2010, and the 2019 drone attack on Saudi facilities, which removed 5.7 million barrels a day, about 5% of world output, for less than a month.

• Yergin (1991), The Prize · pdf pp. 1049, 1061-1063, 1072-1073, 1081
• Morgan (1979), Merchants of Grain · pdf pp. 337, 364
• Radetzki & Wårell (2021), A Handbook of Primary Commodities in the Global Economy · pdf pp. 200, 203-204

4.3 Sanctions reroute trade more often than they stop it

Sanctions are embargoes imposed on a producer by importers or third parties. Blas and Farchy note that before 1991 the UN Security Council imposed economic sanctions only twice, on Southern Rhodesia in 1966 and South Africa in 1977, and more than twenty times afterwards. For decades traders treated sanctions as an opportunity: a sanctioned country has fewer buyers and sellers, so whoever deals with it earns a fatter margin. Marc Rich and John Deuss made fortunes supplying oil to apartheid South Africa in the 1980s. The methods were subsidiaries in countries that had not imposed sanctions, shell companies, and ships flagged in Panama, Liberia or the Marshall Islands. Vitol used a Bahrain subsidiary to trade Iranian fuel oil in 2012.

The dollar changed the balance. Almost all commodities are priced in dollars, and dollar payments clear through American banks. Washington used this to enforce its sanctions abroad, then added secondary sanctions, threatening to cut off from the US financial system any firm that dealt with a sanctioned party even in other currencies. BNP Paribas's 2014 guilty plea, with a penalty of $8.9 billion, warned banks and the traders they finance.

A sanction raises the cost of moving the sanctioned barrel or tonne. The seller accepts a discount, sells to fewer buyers over longer routes, and pays more for ships and insurance. World supply falls less than the headlines suggest; the sanctioned state's revenue falls by the discount and the extra cost. The table shows the traces: Russia is missing from reported crude, wheat and pipeline gas exports, Belarus from potash.

• Blas & Farchy (2021), The World for Sale · pdf pp. 296-301, 356

See it in the table

Check your understanding

In December 1973 the net loss of Arab oil was about 9% of supply. Why was the shock larger than that number suggests?

Which closure would mainly lengthen voyages rather than trap supply?

What gave US sanctions reach beyond American borders, according to Blas and Farchy?