Oil prices are already up after Washington’s decision last month not to renew Iran sanction waivers and amid signs that few if any shipments are leaving Iranian ports. In an already tightening market, current military tensions are likely to push these prices higher. It is still unclear whether the purported tanker attacks near Fujairah on May 12 are linked to Iran, but the subsequent media battle, the misreporting, and the 2 percent increase in oil price all demonstrate how sensitive the political situation and oil prices are to regional posturing. The price response is a function of the risk of conflict, its potential impact on oil exports, and the military and oil policy scenarios that may develop as a result around one of the most critical choke points in the global oil supply chain.
Around 18 percent of global oil demand (or 18 million barrels per day [mb/d]) flows through the Strait of Hormuz at the twenty-one-mile-wide entrance to the Persian Gulf. When formulating energy security strategy at NATO in the late 2000s, we focused on international shipping lanes around choke points like Hormuz because of their vulnerability to piracy, accidents, and strategic conflict.
But the risk is not really that Iran will block the strait; the US Fifth Fleet in Bahrain should quickly neutralize any attempt to do that. Increased maritime hazard would more likely occur as a result of mines, rocket fire, or even sabotage affecting insurance rates and shipping schedules. The Fujairah attacks could be a sign of things to come. Yet under conditions of such sporadic threat, transit volumes would probably not decline significantly, even if tankers were eventually subject to naval escort timetables. During the height of the “tanker war” in the mid-1980s when Iran targeted oil exports to cripple Iraq, only 2 percent of shipments were disrupted. Experience shows that despite higher-risk premiums, insurers will continue to cover ships and cargos, and sailors will continue to sail.
Recent tanker attacks and diversions on the other end of Arabia near the Bab al-Mandeb strait show that Iran’s regional proxies and allies can also affect shipments. Some ships veered farther from the Yemeni shore after a Saudi tanker was hit in 2018, but only Saudi Aramco stopped transiting the area. If these kinds of proxy attacks on vessels are stepped up, for example in the Persian Gulf, then in the absence of direct conflict the United States and its allies could find themselves in the awkward position of facing shadow saboteurs without a fixed target to retaliate against. But supplies will continue to flow.
The more serious risk of oil supply disruption probably comes from attacks on export infrastructure, perhaps by Iranian proxies in Iraq, and particularly if Iran targets Saudi installations on the opposite shore. A May 13 Houthi drone attack on an East-West pipeline pumping station shows how cheap UAVs can now reach far into the country, even if their impact is limited. Saudi Arabia exports about 7 mb/d, most of this via its main Persian Gulf ports of Ras Tanura (3.4 mb/d capacity) and Ras al-Ju’aymah (3 mb/d capacity). Both ports, as well as oil stabilization towers at Abqaiq, are well within range of Iranian missiles.
A direct attack would represent a major escalation, but the impact could be significant. A 2011 Belfer Center study calculated that it would require thirteen hundred Shahab-type missiles to achieve a 75 percent probability (with Patriot missile defense attrition) of knocking out Abqaiq and thousands to knock out an entire port. At the time of the study, Iran only had about four hundred of these missiles. But the Iranian missile program continued, unrestrained even by the JCPOA, and antiradar homing technology on the modern Fateh-110’s has increased their lethality. Whether or not installations are seriously damaged, the presence of falling missiles would cause the evacuation of personnel and at least partial shut-in of the facility for the duration of the attack itself (which may be spread over days or weeks).
If all of Abqaiq’s 7 mb/d capacity were taken offline, either by damage or shut-in, Saudi Arabian exports could fall by more than 3.5 mb/d. Without a functioning wharf at Ras Tanura, other ports and the East-West pipeline to the Red Sea could still export upwards of 9 mb/d, so exports might fall by about 1 mb/d.
Such a supply disruption would likely prompt a strategic oil stock release coordinated by the International Energy Agency (IEA). At the IEA in 2010, we developed stock release simulations around possible instability in the region. Supplies would comfortably be covered by existing strategic oil stocks, particularly over a thirty- to ninety-day release period when facilities might be shut in because of an ongoing safety threat.
In the lower-probability case of significant infrastructure damage, longer-term outages can result when specialized repair parts are not readily available. Saudi Aramco has worked to develop redundancy and flexibility in the repair supply chain to improve resiliency, in part by fostering technologies like on-site 3-D printing, but some of these technologies are still in development. A six- to fifteen-month repair time is “in the midrange” of past repair experiences. Even in a relatively extreme case, a 1 mb/d to 4 mb/d disruption would not come close to depleting IEA strategic stocks—the US Strategic Petroleum Reserve (SPR) alone holds 650 million barrels.
Oil prices will certainly spike if the threatened attack on oil exports from the Persian Gulf materializes. But in terms of volume, those exports are resilient because for the right price ships will continue to sail; spare capacity and redundancies exist for most oil facilities; repair times are improving; and international strategic oil stocks provide insurance against the most extreme scenarios.