Iran’s threat to close the Strait of Hormuz, which accounts for a fifth of the world’s oil supplies, or to strike somehow at tankers passing through it, are preoccupying mainstream media, which love stories that make the rarefied world of oil easier to understand.
To be sure, Iran has the means to shut the waterway — at least for few days. An analysis piece from Reuters says it could take an “asymetric” approach:
Missiles mounted on civilian trucks can be concealed around the coastline, tiny civilian dhows and fishing vessels can be used to lay mines, and midget submarines can be hidden in the shallows to launch more sophisticated “smart mines” and homing torpedoes.
Iran is also believed to have built up fleets of perhaps hundreds of small fast attack craft including tiny suicide speedboats, learning from the example of Sri Lanka’s Tamil Tiger rebels who used such methods in a war with the government.
At worst, its forces could strike simultaneously at multiple ships passing out of the Gulf, leaving a string of burning tankers and perhaps also Western warships.
But a more likely initial scenario, many experts believe, is that it would simply declare a blockade, perhaps fire warning shots at ships and announce it had laid a minefield.
“All the Iranians have to do is say they mined the straight and all tanker traffic would cease immediately,” says Jon Rosamund, head of the maritime desk at specialist publishers and consultancy IHS Jane’s.
People need to calm down about Hormuz. Iran relies on the waterway to sell its own oil. As long as it keeps exporting, it isn’t going to shut down the Strait. Elections are looming in Iran (as in the US, one of the reasons for the sabre-rattling) and inducing an economic collapse isn’t likely. Nor would Iran wilfully hurt its buyers in Asia, which would undermine China’s diplomatic support for Tehran. And as most military analysts agree, any closure of the Strait wouldn’t last.
So the Hormuz threat is a red herring, as I argued yesterday in a piece for Petroleum Economist. (Second link.)
That doesn’t mean, though, that things aren’t getting very serious for the oil market. Iran knows the tighter sanctions — especially those against the ICB, which could stop any Chinese, Japanese or Indian company with a presence in the US from paying Iran for oil — spell disaster.
Its economy minister, Shamseddin Hosseini, yesterday said the new measures amounted to “an economic war”.
A piece in The Economist (for which I sometimes write) yesterday focused almost entirely on Iran’s potential military response to the EU’s proposed ban on Iranian oil imports and America’s sanctions against the Iranian Central Bank.
Among the possibilities:
Iran could also strike at American economic interests in the Gulf, such as oil facilities and tankers, and block ships by laying mines, as it did during its war with Iraq in the 1980s. And it might deploy its paramilitary allies elsewhere in the region, such as Hizbullah in Lebanon, Hamas in Gaza and insurgent groups in Afghanistan, to create as much mayhem as possible.
This is correct, but it doesn’t go nearly far enough — at least not for what could begin really to trouble the oil market.
As I argued in my article yesterday, Iran’s proxies in Iraq — which is deteriorating rapidly and which, from Nuri Al-Maliki’s government to the Mahdi Army in Sadr City, is increasingly under Tehran’s sway — could cause much more trouble. Further disintegration in Iraq will severely threaten its future oil production growth.
That’s a possible fallout that should worry the oil market. Iraq believes its oil output will rise by 600,000 b/d this year, to 3.3 million b/d. If that short-term growth plan runs into trouble, the market will get even tighter than it is now.
It could get even worse. Bill Farren-Price, of Petroleum Policy Intelligence, argues (in client-only analysis) that Iraq may even struggle to keep existing production levels going. There is little security along export pipelines, for example, which leaves them vulnerable if conflict spreads beyond Baghdad, locus of a recent spate of bombings.
Tehran’s proxies could cause much chaos across the border. “Who controls Iraq? We do,” Iran’s deputy oil minister, Alireza Zeighami, told me in an interview in Doha last month. As Farren-Price says: ”You can no longer talk about Iran without talking about Iraq,”
So forget Hormuz. Sanctions on Iran’s oil, if they work, will begin to cut its oil output (at 3.6 million, about 4% of the world’s). If Iran wants to cause trouble, its easiest option is in Iraq — hindering production there, too.
So, as I wrote yesterday:
a Western strategy to hit Iran’s oil industry could also hurt Iraq’s. Diminishing Iran’s 2.2 million b/d of exports would already strain Opec’s spare capacity, forcing Saudi Arabia to max out production at more than 12 million b/d. If the unintended consequence of the measures against Iran were more conflict in Iraq and a loss of its production, or scaling back of its forecast output growth, the oil market would come under severe strain.
Opec would be forced to open the taps still further, or risk a damaging rise in oil prices that went well beyond today’s already inflated levels. But Opec’s spare capacity, probably at about 3 million b/d, is already thin, and almost entirely dependent on heavy Saudi crude, which may not do the trick.
All this should make people very bullish about oil prices and very worried about the global economy. Any sane person should hope that diplomacy and common sense trump the election-season rhetoric. That doesn’t seem likely.
