How open is the Strait of Hormuz?

We know one thing for sure about the MoU that the US and Iran have signed.

The US wants the Strait of Hormuz opened as quickly and fully as possible. If that happens, oil prices keep falling for a while and governments get a chance to replenish their strategic reserves. To keep oil flowing at the maximum rate in the 60 day negotiation period is what the US wants. 

At the end of 60 days, there is room for an extension. The US administration will keep talking so that oil prices are under control in the run up to the mid-term elections to the US Congress in November. 

Iran would like oil to flow as slowly as possible. The greater the pain to the global economy, the greater is Iran's leverage. Moreover, within the 60 day period Iran cannot charge tolls or fees. After 60 days, it feels it has the right to charge fees towards services rendered to the ships.

So the incentives for both sides are clear enough.

What is not clear is how far the Strait has opened. The priority is to get the estimated 1000 ships stranded during the conflict out at the earliest. The sailors on these ships have had a terrible time in the past 100 days. The middle portion of the Strait needs to be demined and that will take time. Ships can pass through routes close to Oman or those close to Iran. 

The International Maritime Organisation (IMO) has created a route close to Oman through which, they say, tankers stranded during the conflict are passing at a furious pace. Iran objects, saying all ships must pass only through its own designated routes.

Just how much is going through?

In normal times, 135 ships transit the Strait each day. Military analyst Larry Johnson provides data to show that on June 23, only 7-13 ships transited the Strait. On June 24, according to FT, an estimated 41 ships transited, 15 via the Iran route and 26 via the Oman route. That is a huge jump. 

And that jump is precisely what provoked the Iran missile attack yesterday on a ship using the Oman route. The IMO has since suspended its evacuation plan. So the Strait appears to be closed again for practical purposes. 

In return for opening the Hormuz, Iran gets some of its assets released and it gets a waiver of oil sanctions for 60 days. But it loses it leverage over the global economy and the US economy.  

The ceasefire period thus seems to be working to the advantage of the US. The Oman route is spoiling the show for Iran. Iran cannot allow a situation in which it does not control the flow of traffic in the Strait of Hormuz. Hence the Iranian attack on a tanker in the Oman area.  

Will the US construe that as a violation of the MoU? And how will it react if it does?

 

Begone, India's oppressive oldies!

The Economist has a vitriolic piece on how the old in India- that is, anybody who has crossed middle age- oppress the young. It calls them 'uncles'. The piece is worth quoting at length.

An 'uncle' is easily identified:

A dead giveaway is the phrase “let me tell you”. It is inevitably followed by a thesis on what really ails the country. Another hallmark is unsolicited advice, veering from career counselling (“only girls study literature”) to dietary prescriptions (“eat five soaked almonds to build immunity”). But the defining feature of the Indian uncle is his bottomless disdain for the youth of today: feckless phone-addled softies, the lot of them. They need discipline.

How true! Condescension, sanctimoniousness, a know-all air- these are the attributes of the Indian uncle. 

I would add one more giveaway: the constant use of the word 'values'. ("These youngsters don't have any values"). It doesn't occur to them to ask themselves what their own values are.

What they have produced, in pursuit of their so-called values, is a highly repressive culture:

Thus does the country produce such infantilising policies as Gujarat’s plan to require parental sign-off before adult couples can legally marry. Or Goa’s mandatory uniforms for adult students at its public colleges. Or Delhi, where adults can vote at 18 and marry at 21 but cannot enjoy a beer until they are 25.

Thus too are Indians subject to the pronouncements of learned higher-court judges, over 85% of whom are middle-aged men. The Calcutta High Court in 2023 advised young women to “control sexual urges” rather than “enjoy the sexual pleasure of hardly two minutes”. A judge in Karnataka observed that it would be “better for the nation” if social-media access was restricted until the age of 18—or even 21. And on May 15th the chief justice of the Supreme Court lamented that “There are youngsters like cockroaches, they don’t get any employment, they don’t have any place in profession”.

I often wonder whether India's lack of innovation, its mediocrity in most fields is the result of the spirits of the young being repressed all the time.

Then, they are forever exhorting the young to work hard, which is another way of saying 'don't enjoy your life too much'. And the young slog as nobody does in the developed world:

They go to school or university. They attend extra coaching classes. And when they get home they study some more. In May more than 2m candidates sat a national exam for around 130,000 medical-college seats. Nine days later the testing agency invalidated their efforts because papers had leaked. The same month 1.8m pupils received the results of class 12 exams—the single most important test in Indian schooling. Those, too, were full of errors. A parliamentary committee is investigating both fiascos. The uncles will grade the uncles.

The behaviour of uncles is not confined to family. It extends to the workplace. And, most regrettably, the same attitude permeates academia. 

In the name of instilling discipline, teachers draw up rules that would be regarded as crazy in the western world. They also expect unquestioning obedience and  constant 'sirring'. Savage punishment is meted out for even minor transgressions, such as copying in a five-mark quiz.

The young are growing into a relatively more prosperous and freer world than the ones the uncles themselves experienced. That gets to the uncles. There is nothing to the oppression the uncles practice other than malice and envy. 

More power to the young as they stand up to the uncles!

Ouster of BP Chairman: does anybody know how it happened?

I had a post yesterday on the ouster of the BP Chairman, Albert Manifold.

I repeat: it's an extraordinary event. No violation of the law. No violation of regulations. No financial misconduct. Removed only because his behaviour was too aggressive to be acceptable- the expression used is "bullying".

I say it's extraordinary because bullying by those at the top has almost become normalised in most places- and not just in the corporate world. But, remember, in Britain, a deputy PM (Dominic Raab), had to quit in 2023 on similar grounds. PM Rishi Sunak removed him after an investigation showed that, in an earlier avatar as Foreign Secretary, Raab had been abusive towards staff members. 

That does not mean that the UK is free from bullying. However, even if there is the odd instance of somebody being penalised for bullying, two cheers for the same! There is hope for civilisation.

I find the reporting on the event, while extensive, weak on detail. 

How exactly did the removal happen? Typically, it is the Chairman who convenes a board meeting and approves the agenda with the help of the Company Secretary. In this instance, the other directors seem to have met without the knowledge of the Chairman and passed a resolution for his removal. 

An FT report hints at the role of a Senior Independent Director in the whole affair:

For UK governance aficionados, the affair shows the power of the senior independent director when things go wrong in the boardroom.

I infer that the Senior Independent Director is empowered to convene a meeting of the board and act against the Chairman. Does the removal of a Chairman have to be ratified by shareholders? Doesn't look like it.

The board of BP seems to have acted on the basis of whistle-blower complaints about the Chairman. That too is extraordinary. The Chairman and the board receive board complaints about management. But complaints about the Chairman going to other board members is not something one has heard of.

I doubt that what happened at BP is possible in Indian board rooms. The Chairman very often is the promoter of the company even if he is in a non-executive position. It is inconceivable that the other board members can or will act against him. 

But what if the Chairman is not a promoter, just another independent director? Can he be removed by the rest of the board?  Again, I doubt very much.

I whole-heartedly welcome the idea of removing somebody at the top on grounds of bullying or aggressive behaviour. I also like the idea of removing a Chairman who behaves badly. 

Can we hope that Company Law will be suitably modified so that BP-like actions become possible here?

BP Chairman ouster: No bullying please, we are British

The board of oil major BP has removed its Chairman, Albert Manifold, reportedly because he was given to bullying and "shouty" behaviour.  

That is  not what the sanitised text of the board's statement said. The board said his removal, which was unanimous, "...follows serious concerns raised to the board related to important governance standards, oversight and conduct."

An FT report presented a more unsanitised version of what transpired:

Manifold, who was appointed BP chair less than a year ago, was viewed by other BP directors as too aggressive, according to other people familiar with discussions inside the company. Several colleagues saw the level of control he exerted as more akin to that of an executive chair, these people claimed. They alleged Manifold at times spoke down to senior members of staff, both in one-to-one encounters as well as in larger meetings. One person familiar with BP claimed that describing Manifold as “shouty” was “understating it”, adding: “They thought they were hiring a tough change agent, they didn’t think they were hiring a bully.”

It is a tribute to British corporate culture that a Chairman can be removed not for want of performance or for malfeasance but simply because he had behaved badly. 

If the BP board's criterion were to be applied in India, I suspect a significant chunk of corporate India would be decapitated.

 

Rupee slide: is there a case for a rate hike?

 The fall in the exchange rate of the rupee is the biggest concern at the moment. 

The current account deficit is expected to widen to around 2 per cent of gdp in the wake of the surge in oil prices. That is not a big deal by historical standards. We were comfortable with a CAD of at least up to 2.5 per cent of gdp, meaning we could find enough sources of foreign capital to finance the deficit.

Not so today. FII flows have been hugely negative and net FDI too has been negative. We could get public sector companies to raise foreign borrowings with a commitment from the government to cover exchange rate risk. We could resort to NRI foreign currency deposits. And the like.

But why not just raise the policy rate?

Former MPC member, Janak Raj, writing in BS, argues that we should not. He gives his reasons.

Empirical evidence suggests that defending an exchange rate with interest rates rarely works except in a full-blown panic, and even then, it requires very sharp hikes.

In theory, that's not true. Any rate hike, by raising the differential with respect to rates abroad, must cause the rupee to strengthen. Maybe not appreciably. But it should certainly help halt the relentless slide in the rupee. 

Further, he argues: 

The policy rate is an instrument for inflation control. Since exchange rate depreciation impacts inflation, the policy rate should be raised only if inflation breaches the target. That is, the MPC should only be concerned with exchange rate pass-through to inflation. 

By implication, the MPC should react only if the inflation rate exceeds the upper band of 6 per cent. At present, inflation is projected to be around 5 per cent.

The problem is that, if the MPC were to wait until the upper band is breached, the fall in the rupee would have fallen far too far for comfort. The momentum of rupee depreciation may become irreversible. Every fall in the exchange rate of the rupee has its implications for the fiscal deficit, given the reluctance to pass on prices fully to the consumer. 

So, with inflation projected to be in the region of 5 per cent, a judgement has to be made. Given the current geo-political situation, is there a prospect of oil prices rising above, say, $110 per barrel? Even at the present level, are FII outflows likely to persisit?

If the answers are in the affirmative, then there is a heightened probability of inflation breaching the upper band of 6 per cent. That creates the case for a rate hike. No need to wait until the horse has bolted.

Raj argues that the main problem could that India has taxes on capital gains that competing markets do not have. But that is a new situation. It has always been the case. Nevertheless, foreign investors have come in droves because stock returns in India too are higher so that the post-tax returns compare well with those in other markets.

The depreciation in the rupee is not the entirely the result of rising oil prices. Earlier, investors bolted after India was subjected to punitive tariffs by the Trump administration. Not that the CAD was seriously impacted but investor sentiment turned negative. We were told that they did not view with favour a market towards which the US administration had a hostile stance.

The point about hiking the policy rate is that we can expect the effect to be immediate. All other instruments will take time in producing results. 

 

Moment of reckoning in oil markets is at hand

I wrote in an earlier post that the oil markets are under-pricing the risks inherent in the Iran conflict and that a spike in oil prices is not far off.

Even as President Trump weighs the option of another strike on Iran, it appears that the moment of reckoning in oil markets is not far off. Another two or three weeks of the stalemate could push oil prices to over $120 per barrel. And another strike by the US? Well, the bets are truly off.

If that sounds pessimistic, here are two pieces, one by Martin Wolf on the prospects for the oil markets and another by Amos Hochstein on how oil prices can soon impact the US. 

Martin Wolf gives three reasons why we should be worrying:

• The problem is not just the closure of the Strait of Hormuz but the destruction of physical infrastructure in the Gulf countries
• The shortages are not just of crude oil but refined products. The US is a net exporter but it has requirements of imported crude of specific varieties.
• So far the price impact has been muted by the drawdown of stock. But stocks are finite. Moreover, there is not much spare production capacity.

Hochstein presents an interesting fact. Gasoline price has shot up to $4.5 per gallon. The highest level reached so far in the US is $5.02 per barrel which happened in June 2022. Gas prices are poised to rise because, given that jet fuel prices have risen even further, production capacity is being used for jet fuel and not for gasoline! The implications are clear enough:

Energy prices feed into the core consumer price index with a lag of several weeks. The pump pain of May will translate into inflation figures in July and August. The 30-year Treasury yield has risen to the highest level since the financial crisis and the 10-year Treasury yield is already rising. Mortgage costs, corporate borrowing rates and the cost of financing national debt all move with it.

The oil markets are still banking on a swift resolution of the conflict. If that doesn't happen, 'the largest energy shock in history' will wreak havoc on the world economy. 

Vietnam war revisited: the architects knew it was a doomed expedition

Since the Iran conflict is getting branded as another Vietnam, an Economist article on the Vietnam war is worth reading.

In the war, 3 million Vietnamese were killed; over 50,000 American soldiers died. The US failed to overthrow the government of North Vietnam. Instead, it retreated ignominiously as North Vietnam overran South Vietnam and united the two parts.

Why did the US expend so much resources and lives over a decade on the war in Vietnam? The popular view is that the architects of the war- Kennedy, Johnson, McNamara and others- thought victory was attainable and were carried away by hubris.

Not at all, says the author of the article cited above:

America’s decision-makers were hardly experts on Vietnam and its history, but among themselves and behind closed doors they acknowledged that they were entering a deeply challenging environment, in which triumph was far from assured.

The extensive internal record is clear on this score. It shows the private misgivings of senior Washington officials throughout the years of heavy escalation. The sceptics included McNamara himself, and the two presidents he served: John F. Kennedy and Lyndon B. Johnson. From the time then-Congressman Kennedy visited Vietnam in 1951, during the height of the French-Indochina War, until his death in Dallas in 1963, he expressed doubts that Ho Chi Minh’s revolutionary nationalist cause could be subdued by military means. Johnson—who ordered the “Americanisation” of the conflict in 1965, involving the commitment of major ground forces and sustained air power in order to preserve a non-communist South Vietnam—regularly wondered if the struggle could be won, and indeed whether the outcome really mattered.

If that was indeed so, why did these gentlemen embark on the war and pursue it against all odds? The author provides a possible answer:

A key part of the answer is that for both men, maintaining the course, through escalation if necessary, offered the path of least immediate resistance. They and their advisers had offered repeated public affirmations of South Vietnam’s importance to American security, and of the certainty of ultimate success. It made sense that they would be tempted to hang on, in the hope that the new military measures would work. It was about credibility—their nation’s, their party’s, their own. 

Once you sell a story to the public, your best bet is to make the story happen.

We have to wonder: is the same mistake playing out in the Iran conflict now?