As the world is re-learning, national security and economics are as inextricable as a mortise and tenon in a working wooden joint. Rising fuel prices have cost the U.S. defense department over one billion dollars in the past six months. Part of the added cost is in global shipping prices. Shipping costs raise the price of what is paid for gas and oil-based products. In fact, arbitrarily determined shipping costs and their related insurance premiums are already increasing energy bills in a significant way that affects the global price of oil and has received scant attention.
Mercuria Energy Group, a commodity trading giant with more than $6 billion in equity, filed suit against the Baltic Exchange, the nearly 300-year-old institution that sets the world’s shipping benchmarks. Mercuria experienced losses running into the hundreds of millions of dollars on freight contracts tied to a benchmark called TD3C. TotalEnergies, a century-old French, global energy company is reportedly weighing a similar claim.
It sounds like inside baseball for shipping desks, and in one sense it is. But TD3C also settles derivatives contracts on the Commodity Futures Trading Commission-regulated New York Mercantile Exchange, and it feeds into what refiners pay to move crude oil which means a distortion has likely already surfaced somewhere far less exclusive than a High Court docket: for example, at the pump, or in the price tag of anything that started life as a barrel of oil, from plastic wrap at the grocery store to the fertilizer that helped grow what’s inside it.
TD3C is the Baltic Exchange’s benchmark for shipping crude from one of the largest producers to one of the largest consumers in the world–the Middle East Gulf to China–through the Strait of Hormuz, set daily by a panel of brokers who submit rate estimates for the route. For years it worked well, uncontested, as good infrastructure ought to. Then the U.S.’s latest campaign against Iran, and Tehran’s response through interference in the Strait, effectively shut down the Hormuz route. Despite the disruption in freedom of navigation in and around the strait caused by the Iranian blockade and the American counterblockade, the Baltic kept publishing its estimates only this time not based on real transactions, as they had virtually ceased to exist, but solely on panelists’ judgment. Circulars instructed brokers to weigh comparable routes and ongoing negotiations, without ever specifying how. This resulted in a benchmark established by judgment calls rather than methodology and hard numbers. The result? Crude oil that does not pass through the Hormuz Strait—for example, the nearly five million barrels of oil exported daily from the Red Sea Saudi port of Yanbu—is charged at the same elevated rate that it would if it risked passing through the contested strait at the entrance to the Persian Gulf.
Read the rest at RealClear Defense.
Seth Cropsey is the founder and president of Yorktown Institute.
Barna Peterfi is the research director at Yorktown Institute.
