Security of Global Oil Flows: Risk Assessment for India (part III)
Observer Research Foundation
06 December 2011
Continued from Volume VIII, Issue No. 24
The Case of Chock Points: India and Hormuz Strait
India depends heavily on a few oil producers in the Persian Gulf from whom the oil flows through politically volatile narrow sea lanes. OPEC countries dominated by Persian Gulf producers account for over 70 percent of the world’s proved conventional oil reserves and 33.4 mpbd or 40 percent of the output.1 This means that a large share of the oil that flows into Asia is not only produced by a relatively small number of oil producers in the Persian Gulf but also passes through few narrow straights on the Indian Ocean. Globally over 55 mbpd or 64 percent of the world’s total oil flows through narrow straits commonly labelled ‘chock points’. The top three ‘chock points’ account for 46 percent of the total supply.2 The most important among these is the Strait of Hormuz which is also critical when it comes to oil supplies to India as roughly 70 percent of its oil imports have to flow through the Strait of Hormuz.
Hormuz is the narrow bend of water separating Oman and Iran and it connects the biggest Gulf oil producers, such as Saudi Arabia, with the Gulf of Oman and the Arabian Sea. Oil tankers carry between 16.5 and 17 million barrels of crude through the narrow channel daily.3 90 percent of oil exported from Middle East Gulf producers, equal to about 40 percent of all seaborne oil or 20 percent of total oil traded worldwide flows through the Hormuz.4 The bulk of this oil travels to Asia, the United States and Western Europe. About three-quarters of Japan’s oil imports and about 50 percent of China’s pass through this strait.5 An additional 2 million barrels of oil products, including fuel oil, are exported through the passage daily, as well as liquefied natural gas (LNG).6 The world’s largest LNG exporter, Qatar, ships a total of 31 million metric tones annually through the strait to Asia and Europe; India is among Qatar’s LNG customers.7 Iran itself exports around 2.4 million barrels daily, most of it via the Strait of Hormuz.8
Oil tankers passing through the Hormuz were disrupted during the eight year war between Iraq and Iran, particularly during the tanker war phase which started in 1983.9 Iraq and Iran accepted a 1984 UN sponsored moratorium on the shelling of civilian targets, and Tehran later proposed an extension of the moratorium to include Gulf shipping, a proposal the Iraqis rejected unless it were to included their own Gulf ports.10 As Kuwaiti vessels made up a large portion of the targets in these retaliatory raids, Kuwait announced it would seek international protection for its ships.11 The Soviet Union responded first, agreeing to charter several Soviet tankers to Kuwait in early 1987. Washington, which had been approached first by Kuwait and which had postponed its decision, eventually followed Moscow’s lead.12 In March 1987, the United States offered to reflag 11 Kuwaiti tankers and provide U.S. Navy protection. Kuwait accepted. The United States organized a fleet of frigates, destroyers, and minesweepers in the region to protect shipping.13 In July 1987, the U.S. Navy initiated Operation ‘Earnest Will’, to provide naval escorts to tankers passing through the Persian Gulf.14 This temporary disruption of oil flows was not intended to disrupt the flow of oil as the war was being fought over more profound issues between Iran and Iraq.
Historically, Iran has no record of initiating blockades aimed at consuming countries through OPEC or outside it, despite all its anti-west rhetoric.15 Studies have established that the oil output decisions of Iran are by no means less predictable than the production decisions of Canada or Norway.16 Iran has built strong trade relationships with Gulf Cooperative Council (GCC) countries across the Strait of Hormuz following global trade sanctions imposed by industrialized countries. This has increased the cost of a blockade for Iran as GCC countries would seek to protect the Strait of Hormuz from being blockaded by Iran. Saudi Arabia along with Kuwait paid for 55 percent of the cost for Operation Desert Storm and it is likely that they will invest in protecting the Strait of Hormuz if necessary.17
Iran’s oil sector remains important for its economy even though the share of the oil sector in nominal GDP has declined from 30-40 percent in the 1970s to 10-20 percent currently due to destruction of production facilities during the war and OPEC output ceilings.18 Oil revenue accounts for the majority of Iran’s export earnings and over 40-60 percent of Government revenue.19 In 2007 Iran received $ 80 billion in oil revenue accounting for 60 percent of its budget.20 A lack of sufficient refining capacity also makes Iran a net importer of refined petroleum products which have to flow through the Hormuz.21
Despite these very evident deterrents to an Iranian State led blockade of the Hormuz, one cannot rule out the possibility of Iran’s traditional restraint evaporating in the event of a nuclear strike on Iran by the United States or Israel or a humiliating defeat by one of its neighbours in a conventional conflict. Iran would have no choice but to attempt a closure of the Hormuz at least to placate its people. An extended closure of the Hormuz would in theory remove almost 25 percent of world oil supply from the market which is more than twice what was experienced during the 1970s oil crises.
The possibility of Iranian closure of the Hormuz tops the list of global energy security nightmares and needless to say, it has generated countless analysis world-wide. Most of the analyses on such an eventuality look at military capabilities of Iran to carry out a blockade and possible responses from the United States. The broad conclusion is that the threat is real especially if irrationality takes over the current regime but US military superiority will deter or quickly end such a disruption. One exception is a study that argues that Iranian capability to mine ships in the Hormuz is under-estimated while US maritime capability is overestimated and that a possible conflict between Iran and the United States over the Hormuz could be prolonged and damaging.22 Yet another is a study that argues that the impending threat from Iran to the Hormuz strait is but an information campaign to prepare the operating environment and to shape US coalition and world response.23 Apart from deterring a possible US attack, the information campaign is also seen to be an instrument to sway US and to a lesser extent global public opinion away from a military strike and as a means to demonstrate to the Iranian public, that their leaders are able to stand up to global powers. The information campaign is also seen to be shaping the oil market in ways that are favourable to Iran. A tight global oil market with little or no excess capacity is sensitive to developments at the margin particularly those originating in the Persian Gulf. This increases the ‘risk premium’ for oil which has been estimated at anything from $ 2 to $ 27 per barrel.24 This translates into a substantial transfer of wealth from oil importers to oil exporters such as Iran.
to be continued…
Views are those of the author
Courtesy: Paper presented at SLOC Conference
1 World Energy Outlook 2010 2 Global Oil Chock Points: How Vulnerable is the Global Oil Market, 2008. Lehman Brothers Global Equity Research 3 Marco D. Tomasi, M D. 2009. ‘Water-borne IED Threats and the Strait of Hormuz’, JIEDDO J2 Global Information Research Center (GIRC) 4 World Energy Outlook 2010, International Energy Agency 5 Reuters Fact Box on the Straits of Hormuz 6 Reuters Fact Box on the Straits of Hormuz 7 Reuters Fact Box on the Straits of Hormuz 8 BP Statistical Review of World Energy 2011 9 El-Sayyed El-Shazly, N. 1997. ‘The Gulf Tanker War: Iran and Iraq’s Maritime Swordplay, London: Macmillan Press 10 Operation Earnest Will, Global Security.org accessed on 11 Kelley, S.A. 2007. Better Lucky Than Good: Operation Earnest Will As Gunboat Diplomacy, Thesis, Naval Post Graduate School, Monterey, California 12 Kelley, S.A. 2007. Better Lucky Than Good: Operation Earnest Will As Gunboat Diplomacy, Thesis, Naval Post Graduate School, Monterey, California 13 Said Zahlan, R. 2001. ‘The Impact of U.S. Policy on the Stability of the Gulf States: A Historian’s View’, in ‘Iran, Iraq and the Gulf Arab States’, in Kechichian, J (ed.), New York: Palgrave 14 Partin, J. 1998. ‘Special Operation Forces in Operation EARNEST WILL, Prime Chance I, MacDill Air Force Base, FL: U.S. Special Operations Command, History and Research Office 15 The Economist 8-14 November 2008 16 Auerswald, P. 2007.’The Irrelevance of the Middle East’. The American Interest May/June 2007 17 Van Doren, P & Taylor, J. 2007. ‘The Energy Security Obsession’ in ‘The Energy Game’. Eurasian Review of Geopolitics. 18 Ilias, S. 2008. ‘Iran’s Economy’, CRS Report for the Congress, Congressional Research Service, United States. . 19 Economist Intelligence Unit, Country Profile: Iran 2008 20 Erdbrink,T. 2008. ‘Oil Cash May Prove A Shaky Crutch for Iran’s Ahmadinejad’, Washington Post, 30 June 2008 21 U.S. Congress, Joint Economic Committee, ‘Iran’s Oil and Gas Wealth’, 109th Cong., 2nd sess., 2006. Research Article #109-31. 22 Talmadge, C. 2008. Closing Time: Assessing the Iranian Threat of the Strait of Hormuz, International Security, Vol 33, No 1 (Summer 2008, pp 82-117 23 Mills, R A. 2008. US Iran and the Strait of Hormuz: Saber Rattling or Global Energy Nightmare? Naval War College, Newport 24 Multiple sources. $ 27, is the most recent estimate by McKinsy