Since the Strait of Hormuz closed seven weeks ago, I’ve listened to a wide spectrum of analysts discuss what the impacts will be and why.
After almost two months, there are a lot more people talking about this now than there were when I first began listening. Even mainstream new sources are beginning to report on it. It’s become clear that there are inevitable effects on the global economy that will trickle down to everyone, in every country.
In case closely following the impacts of the shipping blockade on countries throughout the world isn’t what you do for fun in your spare time, or isn’t even on your radar at all, I’ll sum up some relevant information. Don’t click away because this seems boring and irrelevant, because this is important to understand so you aren’t caught off guard.
Iran closed the Strait of Hormuz, an important shipping point where twenty percent of the world’s oil passes. While there are many ways that this will flow through the financial pipeline, I’m going to sum up the three that seem to be the most significant.
1) One thing we’ve all noticed is the price increases at the gas pump – it costs more to fill your gas tank. Whatever your personal vehicle runs on, diesel is what fuels all commercial vehicles: farm equipment that is used to plant and harvest food worldwide, trucks that deliver every single thing to every single store, refrigeration to keep food cold as it’s transported, and all other commercial equipment.
When it costs more to produce and deliver products, the price increase will be passed to the consumer.
2) Fertilizer – 30% of the world’s fertilizer passes through the Strait. It’s now planting season; some industrial farmers had already procured their fertilizer so they were able to plant as usual. Many others didn’t have the fertilizer, and will either choose to make do with less, or not to plant at all, knowing they would financially lose by sowing a crop and not being able to sell it for a profit after all of the higher costs.
Here’s a handy formula: if you use ten percent less fertilizer, your yield will be ten percent less. If there’s 30% less fertilizer used, worldwide yields will be 30% less. That doesn’t take into account the farmers who aren’t planting at all, due to not getting the fertilizer in time, the increased cost of fertilizers that they did buy, or the increased cost in diesel. So a lot less food will be produced. It probably won’t be until the summer that the effects of this will be visible.
When there is less supply than demand, prices go up.
3) Decrease in plastic production – oil isn’t just fuel. Many, many, many products are made that are byproducts of oil. That includes plastics, and with less oil available, less plastics are being produced. China is producing thirty percent less plastics right now. If you’re thinking, ‘Great, less plastics! – who needs all that Dollar Tree junk?’, you’re missing a broader perspective.
I’m not a fan of plastics and have made conscious efforts to cut our use of them, but whether you like them or not, they are critical for the way our world functions. Take a look around your home, and note what comes in plastic. The answer will be, virtually everything. If plastic production is less, that will also impact food costs, since your food is mostly packed and shipped in plastic.
Less availability means more cost.
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As someone who is wired to look ahead, I’ve been asking myself from the beginning what this will mean for families. These are serious multiple disruptions occuring simultaneously, and it’s very concerning. There was a time that I would have felt anxious over news like this, but now I understand the supply chain disruptions take time to work through the economy. There’s always a delay, and that means there’s time to make adjustments to your personal budget before the disruptions are felt.
It’s because of this delay factor that prices in groceries stores are still mostly stable. Right now the status quo is still in place, and this is a great time to buffer yourself before the price increases, which are already happening but will be widely visible in Israel within two to three weeks.
It’s expected that in the short term, prices will go up 3 – 8%, with some specific foods expected to go up 10 – 15%. (My experience is that when price increases are predicted, the increases usually end up higher than we’re told to expect, so in my own head I’m some percentage points on to the numbers given.)This is a sudden jump, but it’s not something we can’t adjust for. In a couple of months and beyond, prices will again be adjusted upward and those are expected to be more significant increases. How much prices will spike will depend on how long the Strait remains closed.
Thankfully, we live in a world in which we can be proactive and take some actions that will create some physical and mental margin. As the saying goes, ‘Forewarned is forearmed.’ In the next couple of posts I’m going to hone in on some things you can do right now to keep your expenses in check.
Avivah