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US to Offer Below Market Insurance Rates to Arab Oil Shipping
CNBC Reports that the United States, in an effort to open Hormuz and avoid a rise in global oil prices, will take a series of steps designed to allow shipping to resume. While this will likely change, as it is definitely a "building-the-airplane-in-midair" policy and may in fact just be the administration trying to backfill a Truth Social post from Trump, we're likely to get something like this occurring.
-- There has been no actual Iranian effort to shut Hormuz at this time, rather Insurers have pre-emptively pulled coverage and as a result tankers are unwilling to risk it. It's questionable whether Iran can actually sink tankers, but the global insurance industry has decided it is not worth the risk. As a result oil prices have jumped a bit, though not insanely, since the war's beginning. The US government is now stepping in to offer insurance that insurance companies refuse to offer, "at a very reasonable price". This would amount to subsidizing foreign shipping companies by offering them below-market pricing for their insurance costs, and if payouts must be made the cost of a single loaded oil tanker is likely to land in $250mm range, and could run higher depending on oil prices.
-- While the argument that oil is a global market and it is important to keep energy costs and gas prices low for the American consumer...doesn't it feel odd to you that we're engaging in a giveaway to Aramco and other oil multinationals? It feels wrong, it feels antithetical to an America-First policy platform. We're using the heavily indebted US treasury to backstop foreign corporations and sovereign wealth funds. The policy itself may be sound, but the framing grates on me: we are escorting foreign ships, we are subsidizing foreign corporations, in exchange for little or nothing. I'd sooner see an agreement framed explicitly as Saudi Arabia paying for protection. If the benefits accrue disproportionately to foreigners, foreigners should shoulder the cost. America should not be in the business of subsidizing foreign shipping.
-- Does this alter the Bayesian probability that the Arab gulf kingdoms were the driving force behind the war in Iran? I'm not sure how to parse it, but it sure seems relevant. Is this indicative that they are not onside and need to be bribed to keep the coalition together? Or is it indicative that their support was the driving force all along and the USG is continuing to operate according to the wishes of Aramco?
-- On the positive, this does seem to be an admirable aligning of interests: the USG is both insurer and protector, so it has "skin in the game" to protect the oil tankers at all costs. Or at least up to $250mm or so a ship. Assuming such a thing is possible.
Of course, for Uncle Sam, 250M$ is small fries. Less than the cost of the three F-15s shot down in a friendly fire accident over Kuwait.
Also, I am a bit confused. In the libertarian utopias proposed by Scott Alexander sometimes, insurance companies are a key active ingredient. Here, it seems that either real insurance companies are bad at judging risk (which would be bad for libertarian utopias), or that the USG is bad at juding risk.
I propose that it is the latter.
For Trump, the calculation is very simple. If lack of insurance closes the the Strait of Hormuz, the US economy will tank and he will lose the midterms.
If he gambles taxpayer money, his EV is positive. Either Iran is unable to hit the tankers, in which case the economic impact of his military adventure will be much reduced. Or they manage to sink a few tankers and he has to rescinds his offer. In that case, he loses the midterms.
I also do not see the US navy protecting tankers the taxpayer insures as them having skin in the game. After all, it was not the idea of the navy, and they will not pay out of their own budget. It should be regarded as planned economics: Central Secretary Trump decided that his navy is up to the job, so they get to try to do the job.
By contrast, the capitalist solution would be a mercenary outfit providing both protection and insurance.
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My other thought is that Trump insuring the tankers will make them targets which are a lot juicier. The enemy of the regime is the US taxpayer, who pays for the bombs which are dropped on Tehran. Blowing up a Saudi tanker insured by some generic Western company will hurt the US taxpayer to the tune of perhaps 10% of the replacement price. But if the US taxpayer is also the insurer, that figure changes to 100%.
Basically, if I were an Iranian commander tasked with inflicting monetary losses on the US, and my options would be to (1) try to shoot down three F-15s or (2) blow up an oil tanker passing some 30km from me, I would try option (2). Probably I would just activate lingering torpedos I sunk half a year in advance in the passage, but that would require opsec on a level which Iran probably does not have.
Now I am wondering what size of explosion one would need at the sea floor (perhaps 80m deep) to simply capsize an overhead tanker through the resulting bubble or shock wave. If it could be done with a ton of TNT, that would be an obvious winning move, if it takes a kiloton, that is probably out of reach for Iran.
If as you've suggested the risk is economic collapse and the cost is $250M then it doesn't seem like it's the US Government that's bad at pricing risk.
If the Iranian position is that they will threaten global trade by blowing up merchant oil tankers then the next question isn't how much economic damage America will sustain but whether or not Iran has enough nuclear bomb shelters for 80 million people.
That would be insane. And no way the US violates the nuclear taboo and launches unilateral nuclear strikes over a few oil tankers. Remember the tanker wars in the 80s?
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You think the US is going to nuke Iran over a gulf blockade?
No, we'll nuke them for touching our (and other peoples') boats just like we did Japan.
In all seriousness though I don't think it will escalate to nukes unless the Iranians pop one off first.
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The IRGC leaders know they're dead anyway. What would they care if it's via precision missile or nuclear airburst?
Might as well have some fun on the way out.
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