In earlier posts, as part of my book FLOW:  How the Best Supply Chains Thrive, I predicted how the world would move towards increased on-shoring activity, including a “Pan American” region, an EU-Eastern Europe region, and a SE Asia region.  Recent events have suggested that we are not yet at this point, but nevertheless, some organizations have made great progress in seeking to insulate themselves from global disruption events.  However, no one ever forecast what we are seeing today.

The occurrence of COVID, followed by the Ukraine War, the US tariff announcements, and wars in Palestine and Iran have upended the chessboard and scattered the pieces.  Although the evolution of localized supply chains continues to evolve, for the moment we are still beholden to the global conflicts occurring today.

The media has certainly highlighted the constraints being imposed by Iran on the Strait of Hormuz.  An American attack on Iran could have surely forecast that this would happen.  Consider the role of this  21-mile-wide, 30–35 million-year-old passage connecting the Persian Gulf to the Gulf of Oman:

• Ancient Times: The Achaemenids recognized it as a strategic choke point. Alexander the Great’s admiral, Nearchus, conducted the first recorded survey in 325 BCE.
• Portuguese Dominance (1507–1622): Portuguese explorers captured the island of Hormuz in 1515, establishing a fortress and charging tolls on trade passing between India and the Persian Gulf.
• Safavid-English Alliance (1622): Shah Abbas I of Persia, with support from the  English East India Company. expelled the Portuguese in 1622.
• 19th Century “Pirate Coast”: Frequent attacks by local tribes on shipping led to the British labeling the southern coast the “Pirate Coast,” later the Trucial Coast and now the UAE.
• Modern Oil Era (1930s–Present): Major oil discoveries in the 1930s shifted the strait’s value from trade to energy security.
• Tanker War (1980s): During the Iran-Iraq War, both sides attacked oil tankers, prompting the U.S. to launch Operation Earnest Will to protect shipping.

What makes it so difficult to defend the Strait is that it is surrounded by mountainous ranges on the Iranian side of the strait.  This provides shelter for small missile launchers to hide and continuously move around, making it difficult to prevent them from attacking ships.  The promise of insurance is not enough of an incentive for most ship captains to risk having their oil tanker sunk by missiles.  The result, predictably, is that oil has risen to $100/bbl.  Oil prices impacts gas and diesel prices, which effectively increases the cost of everything from auto fuel, truck transport, resins, fertilizer, and a host of other categories of products. 

A major impact of the war was the impact by the Iran attack on Qatar, in which 17% of their LNG production was destroyed.  Qatar  is the number one producer of LNG in the world.   LNG shortages impact fertilizer makers in Europe and India who need to generate the tremendous amounts of electricity necessary to convert atmospheric nitrogen into plant food.  The Mideast regional price for urea, a form of nitrogen fertilizer, has jumped more than 50% since the bombardment.  Global leaders believe that the increase in fertilizer costs could result in a global famine if spring planting is hindered by this cost increase.  Qatar also produces 35% of the world’s helium, a key component required in chip making.  Other categories impacted aluminum, plastics, and cotton.

The U.S. is somewhat insulated from the LNG shortage, as it is now the number one producer of LNG after the Qatar attacks.  However, the majority of these providers, such as Cheniere Energy, are already producing at more than 100% of their current installed capacity, and most of this production is also committed the long-term contracts with China, Korea, and European countries.  Speakers at the CERA conference in Houston recently stated that all of their gas is spoken for, and we cannot jump in and export to other regions of the world, until more capacity comes online later in the year.

Another major problem facing the U.S. however is its munitions supply.  The US does not have the capability to construct enough arms to replenish what has been used in the Iran war.  Iran, on the other hand, is able to produce weapons in much less time.  Their weapons are inferior in terms of accuracy, and are much less precise, but can be produced much more quickly.  Other supply shortages for weapons production in the US include chips, electronics, precious metals, and skilled labor.   

Creating new capacity in the oil, gas, and arms industry cannot occur quickly.  This could last awhile, even if the war ends tomorrow