The latest threat of closure to the vital Strait of Hormuz tanker artery cannot help but recall those stark images of missile and jet fighter attacks on commercial shipping in the Persian Gulf three decades ago. The escalation of the Iran-Iraq War to involve maritime traffic in early 1984 raised the spectre of the Strait of Hormuz's busy tanker movements being brought to a halt and the immediate cut-off of 20 percent of the world's oil supply.
On that occasion, following an attack by Iraq on Iranian tankers and the Kharg Island oil terminal, the Tanker War escalated sharply to include attacks on ships of neutral countries either carrying cargoes on behalf of the belligerents or deemed to have an allegiance to one or the other party. The Persian Gulf skirmishing dragged on for four years, during which time 546 commercial vessels suffered damage and approximately 430 civilians were killed. Yet at no time in the conflict was Hormuz closed and during the last year of that war US and Soviet Navy escorts helped ensure the waterway remained open for business.
Although tensions in the Gulf have flared up on numerous occasions over the intervening years, the latest threat of a disruption to shipping in the Strait of Hormuz is potentially the most dangerous since the 1980s. The current imbroglio has been brought about by growing unease over Iran's alleged nuclear weapons development programme. Of particular concern is the belief that a uranium enrichment plant near Qom is now producing U-235 material of a grade far superior to that required for nuclear power plants and more suited, with further development over the next few years, to the production of nuclear weapons.
The EU has taken the lead by announcing it will strengthen economic sanctions against Iran by refusing to purchase the country's crude oil unless the current uranium enrichment/nuclear weapons programme is halted. In response, Iran has said it will close the Strait of Hormuz to all shipping if the country's "enemies block the export of our oil".
Although the US has banned the importation of Iranian oil since 1979, the sanctions that other countries have had in place against Iran up until now have not covered the purchase of oil. Iran is OPEC's second-largest oil producer after Saudi Arabia and produces about 3.5 million barrels per day (bpd). Most of this is exported and the country places great reliance on oil revenues to support its economy. Some 85 percent of export earnings come from the sale of oil and petrochemicals.
Of the exported oil, the EU buys about 450,000bpd. Only China, with imports of 560,000bpd, buys more. Although Spain, Italy and Greece rely heavily on Iranian crude and enjoy generous terms on pricing, in the early days of the New Year, Brussels struck an agreement in principle to ban oil imports from Iran as from 30 January. Some EU members have requested "grace periods" on existing contracts of one to 12 months to allow companies to find alternative suppliers before implementing an embargo on Iranian oil.
Although the latest threat by Iran to close the Hormuz waterway has focused attention primarily on the impact it would have on the oil industry, a wide spectrum of maritime trade would be affected. The 14 large, laden tankers exiting Hormuz each day are transporting approximately 17 million bpd of oil and no doubt a closure of the Strait would send oil prices, already high, spiralling further upwards.
There is another key dimension, however, and that is the role that Gulf ports now play in the world gas trades. Qatar has brought six new Super Trains on stream at Ras Laffan in recent years, each capable of liquefying 7.8 million tonnes per annum (mta) of LNG. Qatar now has 14 trains in operation producing an aggregate 77 mta, equivalent to about one-third of the global trade in LNG. Nearby in the Gulf Abu Dhabi produces 6 mta. LNG production in both Qatar and Abu Dhabi would need to be shut down in the event of Hormuz closing.
Although the war of words over Hormuz has escalated during the early weeks of 2012, the countries imposing sanctions believe that they hold a good hand. The US, for example, relies a lot less now on Middle East oil in general than it did in the 1980s. Furthermore, independent tanker owners are unlikely to break the proposed embargo as this could jeopardise their commercial links with both the oil major charterers and the countries imposing the sanctions.
In addition, the Persian Gulf is a more rigorously patrolled stretch of water than it has ever been. Following the invasion of Iraq in 2003, the US Navy presence in the Gulf was augmented and more recently the multinational Combined Maritime Forces, which involves 25 countries, has been established. The US Navy alone currently has 20 vessels in the Gulf, Red Sea and Arabian Sea area. Although the two vessel traffic lanes at the centre of the Strait are only 6 km wide in total, it is expected that blocking the passage to ships and maintaining the blockade will be difficult.
Finally, closure of the Strait of Hormuz would play havoc with Iran's own oil industry. The shutting down of the country's oil wells would not only close off a major source of revenue, it would encumber the country with the considerable technical challenges associated with restarting oil production facilities at a later date.
Ironically, the Brussels decision to ban Iranian oil imports comes at a particularly inopportune time for the EU as many of its member states struggle with the debilitating eurozone crisis. The fall of the euro against the dollar means that Europeans are currently paying record high prices for their oil. At the same time, refinery margins in the region are so poor that several European refineries have recently announced that they will cease operations.
An embargo on Iranian crude oil imports will mean that several beleaguered European countries with abysmal credit ratings will have to search for alternative sources of oil that are bound to be more expensive. The parlous state of the refining industry means that the region may be forced to turn to increased imports of even more expensive refined products.
The EU appears poised to provide a grace period by delaying the implementation of its embargo for six months. At the same time Japan has signalled its backing for maintaining pressure on Iran over its nuclear programme by announcing it would seek to further reduce the volume of crude oil it purchases from that country. Japan has reduced the amount of Iranian oil it imports by 40 percent over the past five years, to the extent that such oil now only accounts for 10 percent of its crude purchases.
Everyone would benefit from a defusing of the current scenario; a visit to the negotiating table by all the principals is urgently needed. Let sensible heads prevail on this very volatile issue that encompasses nuclear weapons development, an Iranian oil embargo and the closure of the Strait of Hormuz.
Mike Corkhill – BIMCO
