Do We Even Need the Strait of Hormuz?
Iran is threatening to close the waterway, through which 20% of the world's oil supply travels. But that would do far more harm to Iran itself than to the rest of the world.
Iran is threatening to close the waterway, through which 20% of the world's oil supply travels. But that would do far more harm to Iran itself than to the rest of the world.
Following scattered attempts at relieving tension between Iran and the U.S., including statements from Iranian officials downplaying the possibility of action in the Persian Gulf, the Iranian Navy announced last week that it would again hold military exercises in the Strait of Hormuz, through which 20% of the world's oil passes.
That same day, Ali Fadavi, the commander of Iran's Naval Revolutionary Guards, suggested to Iranian state media that the world could not persevere even 24 hours without the Strait of Hormuz. Though Fadavi's statement is a blatant exaggeration -- a sudden loss of 20% of the global oil supply would be a severe economic shock, but the world would keep spinning -- it does a raise a key question: Are there viable alternatives to the Strait of Hormuz?
Hormuz, the only exit from the Persian Gulf, lies between Iran on the northern side and Oman on the southern. Almost 17 million barrels of oil pass through it daily, and five of the world's largest oil producers -- Saudi Arabia, Iran, Iraq, Kuwait, and the United Arab Emirates -- are largely or wholly dependent on it, as is Qatar, the world's leading exporter of liquefied natural gas.
There are only two oil pipelines that could be considered ready alternatives. The first is the Fujairah Pipeline. Abu Dhabi, the leading oil producer in the UAE, has spent approximately $3.3 billion building this pipeline, which would bypass the Strait and deliver most of its oil exports to the Indian Ocean. But after years of setbacks, including a six-month delay in 2010 for "design changes," the pipeline has yet to be finished, now slated to start in May or June. Though it would make the UAE largely independent of Hormuz, the pipeline can carry only about 10 percent of the total oil transiting the Strait.
The second is the Saudi Pipeline: The Iran rival's pipeline, known as Petroline, was originally built in 1981, running to the Red Sea port of Yanbu. During the infamous Tanker Wars of the mid-1980s, when fighting between Iran and Iraq threatened to close the Strait, the Saudis increased the capacity to more than 3 million barrels of oil each day and it could now carry 5 million barrels per day. Many experts, including researchers at Rice University, have long called for a significant upgrade to Petroline to bring its capacity up to 11 million barrels per day, enough to carry all Saudi exports with spare capacity for others. This option could take some 18 months to complete, so is not an emergency alternative.
Of course other, even permanent solutions exist, like new or upgraded pipelines leading from Iraq through Syria or Turkey; but again, they would take years to implement. To make matters worse for the West, southern Iraq has close ties with Iran (Vali Nasr, an Iran expert, notes that southern Iraqi "merchants start businesses with Iranian loans," and a million Iranians visit each year, mostly for pilgrimage.) This further complicates the potential for Iraq-based alternatives. Iraq's main Gulf export terminal lies close to Iranian territorial waters.
These two pipelines might offer hope for one day bypassing Hormuz, but in the immediate future, the world is heavily dependent on Hormuz for its oil. The depressed global economy makes the threat of rising gas prices, especially in Europe and the U.S., even more difficult to stomach. The big Asian importers -- China, India, Japan, and South Korea -- are also heavily exposed.
And while oil gets all the attention, other key products must travel through the strait, including 28 percent of the world's liquefied natural gas. It's the only source of gas for Japan, South Korea, and Taiwan, and a vital fuel for reducing European dependence on Russia. Iran's Arab neighbors on the Gulf rely heavily on seaborne food and other imports.
There is another possibility: strategic reserves maintained by the International Energy Agency, an organization of 28 major oil-importing states. Reuters reported on Friday that the agency is discussing releasing strategic oil stocks in the event of a Hormuz shutdown. Each member, including the U.S. and its European partners, is required to maintain oil stocks equal to 90 days worth of imports in case of a market emergency. China has about 20 days of stocks but plans to expand this to 100 days' cover, while India is working on a 2-week reserve.
These emergency supplies could likely replace Hormuz-based oil for the time it would take the U.S. Navy to defeat an Iranian blockade of the Straight -- about two weeks, according to analysts from Societe Generale, a major financial services firm. But they could not outlast a significantly prolonged closure or disruption. Instead of an outright blockade, Iran might aim instead at disruption or sabotage, creating uncertainty and making military countermeasures more problematic.
Despite Iran's tough talk, it seems unlikely that the country would cut off what amounts to its own lifeline. Iran also relies on an open and fully operational Hormuz. As reported in the New York Times, Iran exports almost "2 million barrels of oil a day" through the Strait to countries like China. And the Iranian government, according to researchers at the U.S. Institute of Peace, receives 65% of its revenues through its oil industry; would Iran's shaky economy be able to take such a hit? Probably not.
Like its Gulf neighbors, Iran relies on the strait to move food and other necessary goods. The regime would only hurt an already struggling economy by shutting down the strait: unemployment is officially at 12.5% (Iran observers believe the figure is much higher) and Iranian officials admit that inflation could rise over 20% later this year. Economics aside, a battle with the U.S. in the Gulf would not be an even match-up for Iran. That's why Fadavi, the Revolutionary Guard's Naval commander, and other blustering Iranian officials are, for now, talking and not acting.