Inflation is rising in the United States and Europe as a result of the visible increase in gas and oil prices after seven months of a wide-ranging regional war in the Middle East. The US Federal Reserve has raised interest rates, going against President Donald Trump. The European Central Bank has moved in the same direction to try to stop this spiral. It is the cost of the Iran war, geographically focused on the Straits of Hormuz and Bab el-Mandeb. The price increase especially affects diesel, an essential fuel for industrial economies. It is estimated that at this moment the Middle East supplies ten million fewer barrels of crude oil daily to the global economy. The diesel bottleneck is found in the refineries.
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Geography and war are behind this new upward surge. Refineries and gas plants affected by Iranian reprisals in the Persian Gulf, damaged pipelines, a complicated future for the small Gulf oil monarchies that in recent years have become powerful financial enclaves where life was calm and hotels were expensive; broken balances, broken hopes, broken alliances, and two straits adrift. And the Ukraine war is red hot after four years of exhausting fighting. The United States remains still, because Trump and the Republicans are betting everything on the upcoming midterm elections on November 3. No less important elections in Israel on October 26.
The Iranian regime has resisted the military assault by the United States and Israel that began last February. Seven months have passed and now the ancient Persians fiercely control the Strait of Hormuz, where they charge tolls, being lenient with Chinese and Indian vessels. The Houthi guerrillas from northern Yemen, allies of Iran, have just expanded their control of Bab el-Mandeb, with an unexpected military success on the coast. They have taken the port of Mocha and a small island located in the middle of the strait, Perim Island, which allows them to visually control the ships passing between the Indian Ocean and the Red Sea.
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Iran and its proxies now control two vital straits of the world’s main commercial shipping route. In Hormuz, tolls are charged. Merchant shipping insurance has become enormously more expensive. Chartering an oil tanker costs a fortune. The main container shipping companies avoid Bab el-Mandeb and the Suez Canal and send their ships via the long African route (Cape of Good Hope). To complete the picture, the El Niño phenomenon has caused drought in Panama and there are operational problems for larger draft ships in the canal that connects the Atlantic and Pacific through the Central American isthmus. Some merchant ships have begun heading towards the dangerous route around Cape Horn. There lies the feared Drake Passage, which separates the southern tip of South America from Antarctic waters. Other ships opt for the Strait of Magellan, under Chilean sovereignty, less dangerous but with intricate navigation.
Less oil flows from the Middle East into the global market and all commercial shipping has become more expensive. The freight for an oil tanker costs more than one million dollars a day for the first time in history. That record had never been reached before. Diesel prices have risen faster because Middle Eastern oil, denser and heavier, is the most suitable for its production. European refineries do not have enough production capacity to meet all demand, critically depending on imports from the Middle East, Asia, and the United States. Russian refineries are being systematically attacked by Ukrainian drones and the regime of Vladimir Putin has banned Russian diesel exports to preserve the domestic market.
Oil is currently trading at 103 dollars per barrel of Brent, a 54% increase compared to a year ago. Gas is trading at 80 euros per MW/hour on the European index in The Hague (TTF), with a year-on-year increase of 147%. In 2021, before the Ukraine war began, gas cost 20 euros per MW/hour. At that time, Russian gas flowed calmly through the gigantic Baltic Sea pipeline and the CDU of Angela Merkel was still winning elections in former East Germany.
The United States has lost control of the situation after the Iran fiasco
The rise in gas prices will impact the production of artificial nitrogen fertilizers and this will increase the price of many basic foods after the next sowings. Besides oil and gas, a third of the nitrogen fertilizers used worldwide also pass through Hormuz. Advantage for naturally sourced phosphates. Advantage for Morocco, which controls 70% of the world’s phosphate rock thanks to Western Sahara. Phosphates do not replace nitrogen fertilizers in plant development, rather they complement each other, but in a crisis context, those who have phosphate deposits have good capital. Morocco will play a role in the international economy in the coming years. It is worth knowing. Last June, the United States temporarily lifted tariffs on Moroccan phosphates. It is worth remembering this fact to look beyond Ceuta.
The United States has lost control of the situation after the Iran fiasco. With this failure on its back and with the unusual and enormous global alarm about the evolution of Artificial Intelligence, Trump approaches the midterm elections like a runaway horse. Runaway and furious with the Federal Reserve, which has just raised interest rates against his advice.
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Spain closed August with inflation at 4.3%. A noticeable increase that was overshadowed by the events in Ceuta. Spain has been in Ceuta for a month and a half. Inflation data for September is awaited with concern and additional measures beyond the fiscal package approved in March to address the consequences of the Iran war are already being studied.
Soon we will hear about the recovery or not of the so-called ‘Iberian exception’, the cap on the gas price used in Spain and Portugal for electricity generation. The Sumar coalition has already proposed reactivating this mechanism as soon as possible, agreed four years ago within the framework of the European Union: Spain and Portugal could cap the gas price of combined cycles to mitigate the ‘island effect’. We were allowed to set this cap because there are objective difficulties in exporting electricity to the rest of Europe due to a deficit in interconnections, which France has never wanted to accelerate to protect its nuclear market.
We are facing a certain déjà-vu of 2022. That year, inflation began to run wild in many European countries as a result of the Ukraine war and the consequent rise in gas prices. Four years ago, inflation in Spain exceeded 10% during the summer, as had not been seen since the 1980s. There was no recession in Spain; some considered it certain and others seemed to expect it with glee, but the country suffered.
Inflation kills governments, regardless of their political leaning, and the Spanish left suffered a severe blow in the municipal and regional elections of May 2023. The PSOE and its left-wing allies lost the government of six autonomous communities (Valencian Community, Balearic Islands, Aragon, Extremadura, La Rioja, and Canary Islands), lost some relevant mayoralties, and almost handed the presidency of the Government to Alberto Núñez Feijóo. Pedro Sánchez hastily called general elections, disconcerted his main opponent, and on July 23, 2023, managed to have a complicated investiture within reach, while the Popular Party came first, without enough alliances in Parliament. What came after we all know. This troubled legislature has been born of inflation. Inflation derived from the Ukraine war.
Three years later, inflation coming from Hormuz and Bab el-Mandeb – without the Ukraine focus having been extinguished – could take over the end of the amnesty legislature and the Ceuta shock. That risk exists. We are not like in September 2022, with inflation at 8.9%. Price increases are now approaching 5%. If this trend continues, the wave could lead Sánchez to call elections in February or March next year to avoid worse outcomes for his party. Sánchez and the PSOE are suffering serious wear due to the Ceuta crisis, they already carry a heavy burden in a tumultuous legislature, but serious polls say they have not collapsed. They are declining, but it cannot be called a collapse. Inflation could be the final blow. Inflation is rising to the attic and could take over the political outlook of a very tense country.
Let us pay attention to the November 3 elections in the United States. The direction will be decided there.
