Assessing the Threat in the Strait of Hormuz
The Wall Street Journal reports that oil prices are up again today, apparently because of the fear of a disruption in the Strait of Hormuz. The price bump follows a series of events in what is becoming a familiar pattern. First, an Israeli politician said today that Iran is making “unacceptable” progress with its nuclear program and that an Iranian nuclear weapon would be an “existential” threat to Israel. Presumably investors fear that this statement indicates an increase in the probability that Israel will unilaterally attack Iran. In the past, Iran has promised to respond to an attack by disrupting oil flows, which would increase the price of oil. Traders, wanting to buy low and sell high, rush into the market to buy oil at its current “cheap” price, so the price goes up today.
Today’s Wall Street Journal report was better than most, because it suggested that an Israel-Iran conflict would threaten oil supplies in two ways:
The comments brought to surface long-held market fear over a potential attack on Iran, OPEC’s second-largest oil producer. Apart from a potential loss of Iran’s output of near 4 million barrels a day, conflict in the region could endanger the vast amounts of oil that move through the Middle East. Iran sits at the mouth of the Strait of Hormuz, through which about 20% of the world’s oil flows — a volume that couldn’t be made up fully through the release of emergency stockpiles in consumer countries.
Most articles just point to Iran’s threat to “close” the Strait of Hormuz. Regardless, these regular references — and their effects on oil prices, which affect consumers around the world — deserve deeper consideration. At the bottom of this post, I’ll point you to a tool that I hope will help you to think through the problems in the Strait.
Of course, Iranian leaders directly control their own production level and exports, so they may have some real leverage there. But Iran consumes a good fraction of its own production, so its exports only amount to a few million barrels a day. And the type of crude that Iran exports (relatively heavy and sour) is relatively substitutable with spare capacity from elsewhere in the world, notably Saudi Arabia. As a result, analysts take the next logical step: to really pose a threat to hurt the world (and, Iran presumably hopes, thereby to deter the Israeli attack), Iran would have to cut off not only its own exports but also other oil flowing out of the Arabian Gulf — including that Saudi spare capacity that might counterbalance any Iranian export embargo.
The next leap that analysts and reporters make, though, is the one that is much more questionable: they assume that if Iran wanted to do so, it could readily reduce the flow of oil through the Strait of Hormuz from its current level of 17 million barrels a day down to zero.
If the world didn’t lose its nerve and kept trying to send oil tankers through the Strait — a tremendously profitable activity at the current price of oil — it would require a complex military operation to interdict all of those oil tankers. Could Iran pull it off? How much could they succeed?
Oil markets need to do a better job of analyzing this threat — and so do politicians of all political stripes analyzing the threats to American interests around the world and making decisions about American foreign policy. In the spirit of improving the bipartisan debate on important policy questions, I worked with a group of graduate students over the past year to develop a web site that organizes a great deal of background information on the threats to oil flows through the Strait of Hormuz. The project was sponsored by the Robert S. Strauss Center on International Security and Law, and the Hormuz web site is now up. The site includes information on the strategic geography of the region, on how the oil market works, on how tankers and insurance firms have responded to military attacks in the past, on how the various weapons that might be used against tankers work and on how effective they might be in stopping a tanker’s transit, and on other relevant topics.
Ideally, this site would have been “live” at the beginning of July, in the last round of Hormuz excitement when Iran test-fired some medium-range ballistic missiles near Hormuz — weapons that are far too inaccurate to pose any threat to shipping but nevertheless sparked fears of increased Iranian capability to make trouble in the Strait. Or the site might productively have been up in June, when the previous round of Israeli comments sparked a surge in oil prices. Or last January, when an incident between Iranian boats and U.S. Navy ships sparked the release of some doctored videos (one by each side) and much hand-wringing.
Oh, well. The site is up now, and its material should still be useful. As the Journal reported, there was another incident today, and there are sure to be many more in the weeks to come. I hope that everyone will find the site useful in developing their views on the realistic level of threat. For what it’s worth, my views are summarized on one page of the site (here), although even people who disagree with me can surely make use of the data and organization of the rest of the site.
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