Yesterday’s reported attacks on tankers near the Straits of Hormuz sent blood pressure up on the Nymex and similar places, even as neither lives nor oil were lost. This almost undoubtedly reflects the kind of asymmetric attack I suggested as retaliation by Iran against the U.S. and its allies (Saudi Arabia, the U.A.E.) and represents an alarming escalation of the conflict.
This is hardly a new experience: the 1980s saw a lengthy ‘tanker war’ as a subset of the Iran-Iraq War, with attacks on oil tankers by both sides, as they sought to deny each other access to world oil markets. What is not remembered is that the attacks were largely ineffective (it was several years before the first tanker was sunk), the primary result being higher insurance rates for shippers. The fact that there was an enormous spare crude oil production capacity around the world was an important offsetting factor which is not the case presently.
The oil industry is frequently targeted during war and insurrections, for obvious reasons. As bank robber Willie Sutton supposedly said, “That’s where the money is.” Nobody gets hot and bothered if the shrimping industry in the Persian Gulf is disrupted, but oil is the lifeblood of most of the regional economies, to say nothing of the world.
As an added bonus, crude oil burns and gasoline explodes, so that a small effort can yield a really spectacular result; soaring flames and thick smoke make for a great visual, even if the actual damage is minimal, which is often the case. Colombian rebels attacked oil pipelines hundreds of times, disrupting production somewhat but hardly shutting down the industry. Similarly, attacks on pipelines in northern Iraq lowered exports from time to time, but political disputes between Baghdad and the Kurdish regional government had a much greater impact.
This reflects the fact that much of the industry infrastructure is resistant to destruction. A tanker is primarily a large steel box. Putting a hole in one requires little more than a patch, which is easily accomplished. Destroying the superstructure, with the crew quarters and control equipment, requires more costly repair but will rarely sink the ship and is much harder to do than simply hitting the ship. Creating a leak certainly does damage to the environment, but compared to, say, the oil well fires of Kuwait that Saddam Hussein triggered in 1991, the impact is not great.
The industry does have a number of points of vulnerability, but these are also heavily protected. The Straits of Hormuz are a major chokepoint, making them an attractive target for those wishing to disrupt oil trade, but there is an enormous amount of military hardware focused on them. Damaging one or more tankers is obviously easy, but shutting down shipping would be nearly impossible. Only if a national military launched all-out attacks on the Straits could shipping be stopped, but even so, it would be temporary as the U.S. Navy especially attacked missile launchers and naval bases employed in the effort. Insurance rates would rise and risk-averse shipping companies would avoid the Gulf, but the trade would continue.
The same is true of the industry infrastructure, such as loading terminals and oil-gas separation facilities. There are a few large ones in the Gulf and they could be tempting targets, but again, security is tight and it is hard to see where anything short of a massive bomb would do lasting damage. The U.S. Army Air Force discovered this when attacking German oil facilities in World War II; they required massive effort for moderate results.
Which is not to say that prices could rise sharply, possibly for months. If Ras Tanura, the main Saudi oil loading terminal, were attacked by a suicide bomber (on a truck or ship), global oil prices would soar and remain high while repairs were underway. And such attacks could add to the so-called security premium even if they were not effective.
If there are more attacks on Gulf shipping, oil prices will remain elevated, spiking briefly at least on every rumor, settling back on the more detailed news, but gradually creeping up. The big concern is that, if the Iranian government is found responsible, and the U.S. responds militarily, the region could become engulfed in a major conflict at a time when it’s oil cannot be easily replaced. Perhaps the Strategic Petroleum Reserve will at last fulfill its function. (No, I won’t compare it to The Wall on Game of Thrones.)
