Is War in the Oil Passageways Serious?

In recent days, Iranian officials have repeatedly threatened the United States with closing the Strait of Hormuz, a passageway through which 20% of the world's oil and petroleum products are produced and 30% of oil tankers pass. However, few expected that the Houthis in Yemen, one of Iran's allies, would target Saudi Arabia's supertankers in Bab el-Mandeb. Currently, Saudi Arabia has halted oil exports from this strait, which connects the Arabian Sea to the Red Sea, although alternative routes exist, and this incident has had almost no impact on global oil prices. Recently, Iranian President Hassan Rouhani also threatened the U.S., stating that there are 'many straits,' but did not specify whether he meant oil passages or used the term in its general sense, meaning 'a point of contention and creating problems.' One day after the targeting of Saudi oil tankers in Bab el-Mandeb, Qassem Soleimani, commander of the Quds Force of the Islamic Revolutionary Guard Corps, stated that 'the Red Sea is no longer safe for American presence.' Whether Iran was involved in the Houthis' attack on Saudi supertankers, each capable of carrying two million barrels of oil—equivalent to Iran's daily oil exports—is not the subject of this note. However, what will be the impact of insecurity in the region's oil passageways on global oil markets? There are a total of eight major oil passageways in the world, with the Strait of Hormuz being the most important. Bab el-Mandeb is also the fourth largest oil passageway in the world. According to statistics from the U.S. Energy Information Administration, in 2016, 18.5 million barrels of oil and petroleum products passed through the Strait of Hormuz daily, and about 4.8 million barrels passed through Bab el-Mandeb. A significant portion of Iran's oil and gas condensate exports also passes through the Strait of Hormuz. However, the important point is that over 80% of the oil that passes through the Strait of Hormuz goes to Asian markets, particularly China and India, which are Iran's largest trading partners. Closing the Strait of Hormuz would primarily disrupt their economies. China and India have been complaining about the $70 oil price in recent months. However, Saudi Arabia and the United Arab Emirates, as the largest American allies in the region, who will play a key role in compensating for the reduction in Iran's oil exports due to sanctions, have some alternative options to bypass the Strait of Hormuz. According to OPEC statistics, last year, Saudi Arabia and the UAE exported a total of 9.347 million barrels of oil daily, with more than three-quarters going to Asian markets. These two countries have pipelines to bypass the Strait of Hormuz, with a combined capacity of about 5.5 million barrels per day. On the other hand, oil production in these two countries increased by about one million barrels after the OPEC agreement to increase production last month. In other words, the UAE and Saudi Arabia would still lose half of their daily oil export capacity if the Strait of Hormuz were closed and they relied on alternative pipelines. If Iran is determined to stop all oil exports from the Strait of Hormuz, the situation would become complex. According to estimates from Forbes magazine, a 10% reduction (about 10 million barrels per day) in global oil supply could increase its price by 250%. In other words, if 10 million barrels less oil from the region were to reach global markets due to the closure of the Strait of Hormuz, the price of oil could soar from the current $70 to $245. Regarding Bab el-Mandeb, the situation is simpler, as oil tankers can circumvent this passageway by taking a longer route at a slightly higher cost. However, the closure of the Strait of Hormuz by Iran is highly unlikely. Aside from the fact that this action would mean military confrontation with the U.S., Iran exports tens of billions of dollars worth of petroleum products, gas condensates, petrochemicals, and goods through the Strait of Hormuz annually, most of which goes to Asian markets. In other words, it is not just Iran's crude oil that passes through the Strait of Hormuz. Other products, especially condensates, petroleum products, and petrochemicals are not subject to sanctions, and their export is essential for the country. Another point is the exports of countries like Kuwait and Iraq from this strait, which have good relations with Iran. Additionally, attacks on oil tankers and oil spills could have significant environmental consequences that may not be recoverable for decades, not only for the countries in the region but also for Iran itself. Moreover, a significant portion of Iran's imports comes from the UAE. The UAE is the second-largest destination for Iranian goods exports. Last year, Iran exported $6.764 billion worth of goods to this country, accounting for nearly 15% of Iran's total non-oil exports. The UAE is also the largest customer for Iranian petroleum products, especially fuel oil, which generates billions of dollars for Iran. Iran also imported over $10 billion worth of goods from this country last year, equivalent to 18.5% of the total imports of the Islamic Republic. The UAE is also the second-largest exporter of goods to Iran, although Iran imports products from other countries through the UAE, and Iran's exports to the UAE ultimately reach customers from other countries.