Rob’s comments below are in italics.Derek’s comments below are in normal font.

We were talking last week about the outbreak of war in Iran. There’s going to be an economic knock-on effect, and we thought we’d speculate about what it might look like.

Well, I wanted to cover one or two events from last week. We’re now March 13th, which is day 14 of this war in Iran. In many ways, it has continued to develop in the predictable fashion it has so far, without any sign of sanity breaking out.

Apart from summarising some of the key features of the last week, I also wanted to look at the likely economic effect. There’s also the more fundamental issue of what I see as a foretaste of things to come — patterns of energy consumption over the next few decades, which still don’t seem to have been taken seriously by those in positions of power, despite the fact that the writing is clearly on the wall for the energy consumption we’ve been taking for granted in recent decades.

The public discourse around the closure of the Strait of Hormuz seems to focus mainly on the likely effects on oil prices. Even the less optimistic mainstream estimates seem to me to vastly understate the possible downsides if this situation persists for any length of time.

The main point is that the Strait of Hormuz has remained effectively closed. The Iranians are letting their own tankers through, which would suggest that reports of mining are probably inaccurate. They have complete control over the strait and are not allowing any other vessels through. A cargo ship was attacked, and the last time I checked, six vessels had been badly damaged — the cargo vessel and five oil tankers.

There were two very dramatic destructions of American-owned oil tankers off the coast of Iraq, which appeared to have been fully loaded. They spectacularly went down in flames, triggered by unmanned naval drones against which there seem to be very few effective defences. Trump has been saying that his forces destroyed the Iranian Navy. He may well have destroyed a lot of large, possibly obsolescent warships, including one that was completely unarmed and returning from a joint peaceful exercise with India.

Trump made a couple of announcements in the last day or two, which temporarily reversed the climb in oil prices. One was that he was relaxing sanctions on Russia exporting its oil, which has enraged those who hoped to starve Russia of funds to force an end to hostilities in Ukraine. These events have now provided Russia with a massively larger income. There doesn’t seem to be much joined-up thinking in their policymaking.

The other announcement was that Trump said they’d be releasing 172 million barrels of oil from the strategic reserves. Those reserves are already at their lowest level in 30 years, so this further depletes them. The easing in crude oil prices caused by those announcements has been very short-lived, and prices have bounced back up. As of this morning, the price of Brent crude has exceeded $100 per barrel.

Looking at the energy implications of all this destruction and the energy consumed in running a war, it really does seem that warfare is reaching the point where it truly becomes a losing proposition any way you look at it. With modern weaponry, it is clearly much easier to destroy things than to make them. The costs of going into conflict are likely to outweigh any conceivable benefits. This has been obvious to many people for the best part of the last century, but unfortunately not to those controlling whether we embark on these adventures.

Ultimately, it benefits Raytheon, BlackRock, Lockheed Martin, and various other weapons manufacturers.

Yes, on a very short-sighted view.

So we’re going to be looking at vastly increased petrol prices, which is what most people focus on. The implications of cutting the flow of oil and natural gas go way beyond that.

It’s not just about filling your car, is it?

It’s not just about filling your car. It’s about the whole way our industrial and economic system is configured, and the assumptions underlying it. A huge use of natural gas, beyond the obvious heating and energy production, is as a major component in the manufacture of fertilisers. A considerable amount of fertiliser is produced in the Gulf States and shipped out. Already, there has been a near doubling of fertiliser prices in the United States in just these two weeks. That will have long-term effects on farmers’ economic viability, their ability to produce food, and food prices.

We rely on fertilisers because of big farm consolidation, which has made it more efficient to paper over soil degradation with more fertiliser. With smaller farms and regenerative farming, this wouldn’t be as much of an issue.

Yes. If there is a human race at all by the end of this century, we will have to return to fully regenerative, fully organic farming. This isn’t some fanciful hippie idea — it’s simply an acknowledgement of reality.

There’s another thing I learned in the last few days. A significant byproduct of refining the heavy grades of crude oil produced in these regions is a great deal of sulphur. Sulphur is an important industrial feedstock for several reasons, most notably in the manufacture of sulphuric acid. Sulphuric acid is itself a major feedstock for a number of industrial processes, most particularly for the extraction of copper and manganese.

Worldwide copper production is already struggling to keep up with demand — another factor to consider when trying to re-engineer our energy supply to be more electric, since there is really no substitute for copper as an electrical conductor.

A similar story for silver, perhaps. There isn’t enough silver in the world for everything they want to do.

Exactly. Another factor in the Strait’s closure is that the Gulf states are almost entirely dependent on imported food, given that most of them are desert. Not only can no oil be exported, but no food supplies can be delivered if the Strait is closed. There will be a severe crisis across all those states.

The other strategic implication is that the deal with the Gulf states was that America would place all those bases there to guarantee their protection. As we’ve seen, it has had quite the opposite effect.

That’s going well, isn’t it?

It has made them a target. Iran has said a couple of things — one being that it will open the Strait to shipping from nations that have expelled their Israeli and American ambassadors.

That’s not likely to happen, is it?

Spain, as I understand it, has already withdrawn its own ambassador to Israel. Under normal diplomatic protocols, if any country withdraws its ambassador, the other country is obliged to reciprocate. The Israeli ambassador in Spain should therefore be recalled soon. It would be a very serious reversal of a well-established diplomatic understanding if that didn’t happen.

Another development this week is that Saudi Arabia has apparently rescinded the agreement made in secret between Kissinger, Israel, and Saudi Arabia in 1974. As we’ve discussed, Nixon withdrew the dollar from the gold standard. To limit the damage, they entered into an arrangement with Saudi Arabia: the Saudis would not repatriate the dollars paid for oil in return for gold, but would instead purchase American treasury bonds with those dollars. This has given the United States a free ride for the last 50 years.

It’s an amazing thing to pull off. If you had something someone wanted to buy, you could say: “You can buy it on the understanding that you’ll lend me back the money you’ve just paid me.” A pretty gross diversion from normal economic operations.

I wanted to look at the underlying energy implications of warfare. The most typical oil tanker today is what they call a VLCC — a very large crude carrier — which holds two million barrels of oil. One barrel of oil is equal to 159 litres and has an energy content of 1,700 kilowatt hours.

To put that in perspective, your annual household electricity consumption might be around 5,000 kilowatt hours. That’s the equivalent of three barrels of oil. A tanker with 2 million barrels is equivalent to three and a half gigawatt hours — the equivalent of running a top-end nuclear power station for two hours. Every time one of those tankers is destroyed, that’s literally gone up in smoke.

In the first 100 hours of the conflict, America launched 168 Tomahawk missiles. Each Tomahawk contains a half-tonne warhead and carries 2,200 litres of jet fuel. If you fill your car tank once a month and the tank holds around 50 litres, you might use roughly 600 litres of petrol a year. So by comparison, there is about four years’ worth of fuel in a single Tomahawk flight.

Then there’s the warhead, which is half a tonne. A tonne of TNT has an energy content of 1,200 kilowatt hours, which is equivalent to 133 litres of petrol. So the warhead alone contains the energy equivalent of running your car for three months. That energy has to come from somewhere. These explosive manufacturing plants are chemical engineering establishments that start with a fossil fuel, pass it through a series of processes, and produce the explosive at the end. At each stage, energy is lost due to the laws of thermodynamics.

Then there’s all the material that went into it — the steel, the aluminium, the electronic circuitry. Every single warhead exploded on any side represents a quantity of energy consumed purely for destructive purposes. The point is that we will clearly have to adjust to a way of life much less energy-intensive than what we’ve grown accustomed to. I’d like to do another session going through in practical terms what that might look like.

Just buying local and making local goes a long way, doesn’t it? That feels like the natural state of things. I don’t need to go to the Co-op and buy apples flown in from South Africa when we have apples here.

Exactly. There’s a whole set of issues around that. Thinking about our entire transport structure, there’s really no need for everyone to be running individual vehicles to the extent we do, only to sit in traffic jams a good deal of the time. Do you have any other observations?

I’ve been enjoying Chris Hedges’ commentary on the situation in Iran. I might reference that in the show notes for anyone who wants to check out his interview.

Did you watch his interview with John Mearsheimer?

I watched that one, and one with Alistair Crooke as well. Both very good.

All sound people. George Galloway has had some brilliant interviews and monologues, too. He’s very amusing and extraordinarily astute — he doesn’t mind playing the buffoon, but he’s very clever with it. That’ll do for this week. We’ll catch up again in a week’s time.

Thanks for reading Sovereign Finance! Subscribe for free to receive new posts.

This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit sovereignfinance.substack.com