Financial markets got quite excited after Iranian Foreign Minister Abbas Araghchi tweeted at 8:45am New York time on Friday (10:45pm Friday AEST) that the Strait of Hormuz was “completely open”, followed by a series of jubilant posts by US President Donald Trump and a triumphant, if bellicose, speech.
Oil futures fell 10 per cent and the Dow Jones Average leapt 1.8 per cent, rounding off a sprightly week for the share market.
Except Iran reimposed restrictions on the Strait of Hormuz yesterday, and Israel broke the ceasefire it had agreed to on Thursday.
In any case, very few ships got through on Saturday, before it was blocked on Sunday, because insurance premiums remained prohibitive.
We are effectively back in a volatile version of November 2013, when it took 20 months for Iran’s then-foreign minister Mohammad Javad Zarif, and member of the UK House of Lords, Catherine Ashton, the Baroness Ashton of Upholland, representing the P5+1 — China, France, Russia, United Kingdom, United States, plus Germany and the European Union — to negotiate the same sort of deal to the one now being thrashed out at the Serena Hotel in Islamabad, except without seven weeks of war.
Those Geneva talks produced the Geneva Interim Agreement, which led to the interim Joint Plan of Action signed in Vienna in February 2014, followed by the Joint Comprehensive Plan of Action (JCPOA) eventually signed in Vienna in July 2014.
Trump cancelled the JCPOA in 2018, calling it the worst deal ever made, so Iran resumed enriching uranium, which in turn led Israel to persuade Trump to bomb Iran and assassinate its leader on February 28.
This time, Iran and the US, represented by two real estate developers, Jared Kushner and Steve Witkoff, have been negotiating a three-page framework agreement.
Donald Trump said the 2018 plan was the “worst deal ever made”. (Reuters: Evan Vucci)
Nothing formal out of those talks has been announced yet, apart from the fact that talks broke down on April 12, but leaks suggest they are essentially wrangling about time and money, just as they were between 2013 and 2015.
In 2015, the final deal was that Iran would pause uranium enrichment for 10 years in return for the release of $US100 billion $140 billion) in frozen assets. In the end, Iran actually got about $US30 billion.
This time, according to a scoop in Axios over the weekend, the US is prepared to release $US20 billion in cash in return for a 20-year moratorium on enrichment and Iran handing over its existing stockpile of two tonnes of enriched uranium, the result of Trump’s cancellation of the JCPOA.
So it looks like the war will result in a doubling of the pause in Iran’s enrichment program from 10 to 20 years and chiselling the price of that down by 30 per cent.
China takes the win
Was it all worth it? Trump will call it the greatest deal ever made, of course … that is, if it gets done in less than 20 months, or at all, and as long as the Strait of Hormuz really is “completely open” soon, with free passage, no tolls.
The rest of us will be counting the cost in higher fuel costs, higher fertiliser and food prices, higher inflation and interest rates, and a weaker economy.
China — the actual winner of the war — will be enjoying a surge of global interest in its solar panels, wind turbines and electric vehicles.
Meanwhile, in Australia, last week’s fire at Viva Energy’s oil refinery in Geelong was an exquisite metaphor for two decades of energy policy failure.
Our illusions of energy grandeur went up in flames at the same time as Prime Minister Anthony Albanese was in Brunei trying to do another “gas for diesel” deal, because Australia is the biggest consumer of diesel, per capita, in the world, and oil from the Strait of Hormuz is needed to make it.
China is 13th on the list, with a fraction of Australia’s consumption, because most people there are driving EVs, getting deliveries from electric trucks and travelling by high-speed electric rail, all fed by renewable energy.
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That’s because in 2004, China decided to reduce its reliance on the Strait of Hormuz.
At exactly the same moment, Australia decided that she’ll be right, imports will be fine — no worries!
At the end of 2003, the then-Chinese premier Hu Jintao made a closed-door speech to the Communist Party leadership in a Central Economic Work Conference that became known as the “Malacca Dilemma” speech.
He warned the party that China’s energy security was vulnerable to “certain powers” (that is, the United States) controlling the Strait of Malacca, the 2.8 kilometre-wide strip of water between Malaysia and Singapore through which China’s oil has to pass.
In 2004, the so-called dilemma was expanded to include the Strait of Hormuz, and the “Malacca Hormuz Axis” became the basis of a decision by the Chinese Communist Party to invest massively in renewable energy, high-speed rail and electric vehicles — that is, to electrify its economy to make sure they would no longer be hostage to the closure of either of those two straits.
Hormuz is in the news at the moment, but it comes a close second to Malacca as the world’s most important oil transit passage — 21 million barrels a day before it closed in February, versus Malacca’s 24. It is daylight to number three — the Suez Canal, with 5 million barrels a day.
Meanwhile, in Australia …
At the same time as China was deciding to shift from powering its economy with molecules carried through two narrow waterways and instead use electrons generated in China, the Howard government in Australia published a 2004 energy white paper titled Securing Australia’s Energy Future.
That turned out to be an exercise in irony because Australia’s energy future was anything but secured by it.
Basically, the Coalition decided to leave it to the market, even though the white paper warned that Australian oil refineries were uneconomic.
A year earlier, in 2003, as Hu Jintao was making the “Malacca Dilemma” speech, Mobil’s Port Stanvac became the third Australian refinery to close.
Five more would close after that, leaving us with two, one of which caught fire last week.
At the same time as the Australian energy white paper was being ignored and shelved in 2004, China launched the “Mid-to-Long Term Railway Network Plan”, which has in 20 years astonishingly resulted in 54,000km of high-speed rail — more than twice the total in the rest of the world combined.
People still fly between cities in China, but less than half as much as they would have, and much less than in Australia, where Melbourne to Sydney is the sixth-busiest air traffic route in the world.
In 2009, when the Liberal Party had a civil war over climate change that resulted in ferocious sceptic Tony Abbott replacing Malcolm Turnbull as leader, China was launching the Ten Cities, Thousand Vehicles (TCTV) program to promote electric cars.
Ten years later, in the 2019 election campaign, Scott Morrison was still campaigning against EVs, declaring that they would “end the weekend” for ute drivers and boat owners.
Before 2009, BYD was a struggling battery producer; now it is the world’s largest EV manufacturer, and China’s car industry is eating Japan’s and Germany’s.
No official estimate has been made of the Chinese government’s total investment in high-speed rail, EVs and renewable energy, but it could be something like $US4 trillion — double its GDP at the time.
The equivalent of that for Australia would have been $1.5 trillion.
The government’s decision from the 2004 energy white paper was to make an investment of $500 million, which was supposed to leverage another $1 billion in private money.
That total of $1.5 billion would have been exactly one-thousandth of the equivalent of what China spent on securing its energy future, but the money was to have been directed at carbon capture and storage — to protect the coal industry — not at renewable energy or EVs.
But anyway, it never happened.
The white paper did result in a $1.5 billion cut in the excise tax on off-road diesel — to help farmers and mining companies — which further entrenched Australia’s addiction to diesel.
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Seeking a ‘sea of oil’
Meanwhile, energy explorers were well into a multi-decade pivot from looking for oil to looking for gas.
As with the steady closure of oil refineries, the government did not get involved in that. It let the market decide.
Whether there is more oil to find beneath Australia is the subject of geological debate, but two weeks ago, Queensland Premier David Crisafulli announced he was “unlocking the development of Australia’s first oil field in 50 years at the Taroom Trough”, between Bundaberg and Roma.
Crisafulli says there is a “sea of oil” there, but it has not been drilled yet, so no-one really knows.
It is currently producing about 200 barrels of oil a day, which is being turned into diesel at a tiny family-owned refinery nearby at Eromanga.
Maybe there is a sea of oil in the Taroom Trough, but if the Howard government had taken up the recommendation of the 2004 white paper to go hard on renewable energy, we would not need it.
And it would not matter so much when one of our two oil refineries catches fire.
Alan Kohler is finance presenter and columnist on ABC News and he also writes for Intelligent Investor.
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