Strait talking about Hormuz danger
  from: Offshore Engineer
  by: Michael J Economides
  Monday, October 06, 2008

With all of the sabre rattling between Iran and Israel one of the most obvious concerns is the potential closure of the Straits of Hormuz.

The statistics are staggering and telling.

Five of the six countries in the world with more than 75 billion of proven oil reserves are inside the Persian Gulf: Iran, Iraq, Kuwait, the United Arab Emirates and the biggest of all, Saudi Arabia.

Their production capacity is far higher than their current levels. Possessing more than 55% of world reserves, they produce 25.4 million barrels per day, about 28% of world production of 85 million b/d. Whimsical recent claims about a Saudi Arabian oil production ‘twilight’ not-withstanding, the region, mired in war and hostility, is grossly underperforming in energy production, with the well known situation in Iraq and the biting sanctions against Iran. How many people really know that Iran, with the world’s second largest natural gas reserves is actually a net importer of gas? With almost all important gas reservoirs being offshore, Iran under sanctions has not been able to procure the right technology to exploit them. Being a radical Islamic republic has a large penalty associated with it.

Still, the five main players in the Middle East, along with some smaller neighbors manage to export 18.2 million b/d, almost all by tankers.

But the Straits of Hormuz tell a far more compelling story. Along with the Straits of Malacca and to a far lesser extent, the Bosporus, they represent the world’s most vital geopolitical energy choke points. Hormuz is in a class by itself. Of the total world oil consumption, about half, 43 million b/d, is moved by tanker, trans-nationally. Of this, 40% or 17 million b/d pass through Hormuz. The US imports about 10% of its oil needs from the area; China gets about 15%. Neither of them comes close to the Japanese predicament: that country depends for 77% of its oil from the Middle East. Russian oil moving east through pipelines under construction is both iffy and years away, thanks to many Russian problems. Japan must be shaking in its boots for any Israeli military action in the Middle East.

Even a temporary closure of the Straits will make the current run-up on the oil price look like a picnic.

Already, recent oil prices include components that are not normal in any discernible economic analysis. Of the $145 oil, about $50 can be understood by conventional life cycle economics. Our modelling suggests that at least $30 of the additional price is because of environmental regulations, taxes, speculated taxes and permits. The rest, $65, is because of geopolitical tensions, fear and resulting speculation. The Middle East, headed by Iran is already contributing the lion’s share of this extra component of the price of oil.

Iran of course will not sit still in the case of an Israel attack and will lash out in the only way that it thinks it can hurt Israel’s patrons. According to Reuters’ AlertNet Fact Box: ‘Iran has already admitted deploying anti-aircraft and anti-ship missiles on Abus Musa, an island strategically located near the Strait’s shipping lanes’. A second series of retaliatory actions will be a large escalation of attacks against the US military in Iraq.

Closing the Straits of Hormuz will cause the price of oil to shoot to over $200 overnight, perhaps even more. Almost immediately the Strategic Petroleum Reserves of the United States, European countries and China will trigger releases. Re-opening the Straits will become an international priority and the US navy, with the overt support of Europe and China, will be marshalled, in a massive show of force, to police the waterways. Iranian defences will be obliterated. What many fail to grasp is that guerrilla warfare in Iraq, annoying as it may be, is not conventional warfare. The Iraqi forces folded in days. Iran’s military cannot fare much better in a head-on confrontation and guerrilla warfare does not work offshore.

Reopening the Straits would be accomplished within a short period of time but without Iranian exports, still reeling from the national humiliation of an Israeli attack and the inability to retaliate properly.

There is a precedent to the re-opening action and it happened the last time Hormuz was closed. Twice before, in 1984 and 1987 in the ‘Tanker War’ between Iraq and Iran, oil shipping through the Straits dropped by a quarter forcing the US to secure the shipping lanes.

So if the US and Europe, the only ones with the capability to do so, move quickly following an almost certain Israeli attack Armageddon will not be happening but an interim oil shock will be huge. How long it will last is anybody’s guess. OE

Michael J Economides is a professor at the Cullen College of Engineering, University of Houston, and editor-in-chief of the Energy Tribune. The views expressed in this column do not necessarily reflect OE’s position.

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