This catchy tune from a quarter century ago has infected my brain. The contemporized lyrics would read “Dumb Dumb Toll Baaje, Toll Baaje, Toll”.
See, now it has infected you too.
And so, after 2,400 sorties, 3,000 strikes, the downing of an “undetectable” F‑15E, the loss of a KC‑135 Stratotanker, 1,200 confirmed targets destroyed, 2 carrier groups, 13 destroyers and 45,000 personnel deployed, and $30 billion in expenditure, we’re left with $100 oil and a $1 toll.
Iran seeks to impose this toll on each barrel of oil that transits the Strait of Hormuz. A Very Large Crude Carrier’s (VLCC’s) capacity varies slightly by ship but most modern ships carry about 300,000 metric tonnes of crude oil which is equivalent to between 1.8 and 2.2 million barrels of crude oil. The reason for this range is that the actual carrying capacity depends on whether the crude oil is “light” or “sour”. The terms light and sour describe two different qualities of crude oil – density and sulphur content. These are important determinants of refining cost, yield and market value.
And so, a typical tanker would have to pay approximately $2 million of toll to transit the Strait of Hormuz. To put that in perspective, the insurance cost of transit from the Persian Gulf to Mumbai under normal circumstances is about $400,000. This is typically made up of three components 1) Hull and Machinery insurance 2) Protection and Indemnity insurance and 3) War-risk insurance. Yes, even before the current crisis every ship was paying a certain amount of insurance for the risk that the Strait of Hormuz could be shut down. Even in normal times, the war-risk component is the highest of the three components of insurance cost. The total insurance cost during normal times is about $400,000. The war-risk insurance cost either shoots up or is unavailable during times of conflict. When available, additional war-risk insurance today is about 8-10x of normal at about $1,000,000. Extreme war-risk moments could raise costs further upto about $10,000,000. These are quite rare and situation specific.
For a normal voyage costs beyond insurance include those for fuel, ports, crew and charter hire. These costs including that for insurance are about $1 to $1.2mm per Persian Gulf voyage.
The toll charges that could amount to $2 million are therefore a meaningful addition to costs of voyage that could result in a tripling of total costs from the normal. If the toll does stay, it will most likely be passed on to the crude oil cost per barrel.
An interesting twist to this is that Iran is seeking to levy this toll in Crypto currency. This sets up a complexity in the mechanics of payment for institutional companies that may not be used to paying any vendors in crypto. The toll fee could also be very volatile unless the cryto used is some form of stablecoin. It is interesting that even when the country seeks to go beyond the dollar, the structural pricing is stated in dollar terms.
Hungama, Hungama, Ho Gaya Hangama
Toll Baaje Toll.