Closing the Strait of Hormuz An Ace up the Sleeve or an Own Goal?

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1 10 February 2010 Closing the Strait of Hormuz An Ace up the Sleeve or an Own Goal? Leighton G. Luke Manager FDI Indian Ocean Research Programme Summary As the diplomatic manoeuvring surrounding the Iranian Government s nuclear programme continues, so too does the possibility that Iran might attempt to interdict traffic passing through the Strait of Hormuz or even to close the waterway entirely. The Strait of Hormuz is a key energy shipping lane and the planet s most crucial chokepoint. Such a move would have profoundly negative consequences, not just for the hydrocarbon exporters of the Persian Gulf, but also for the global economy and Iran itself. Analysis The Strait of Hormuz is the most crucial of all the world s chokepoints. It links the otherwise enclosed waters of the Persian Gulf with the Arabian Sea and the Indian Ocean via the Gulf of Oman, with the Islamic Republic of Iran occupying its northern shores and the Sultanate of Oman s Musandam Peninsula to the south. The two 3.2 kilometre wide shipping lanes (one lane in each direction), separated by Source: Adapted from Perry-Castañeda Library Map Collection, University of Texas, Austin. a buffer zone also 3.2 kilometres in width, are located just inside Omani territorial waters. Approximately 32 kilometres across at its narrowest point, the Strait is the conduit through which the majority of the Middle East s hydrocarbons exports must pass before they can

2 power the global economy. Ninety per cent of the Persian Gulf s oil exports, more than 40 per cent of globally traded sea-borne oil (between 16.5 and 17 million barrels per day (bbl/d)), and the liquefied natural gas exports from LNG giant Qatar, transit this confined waterway. Keeping the Strait of Hormuz open is therefore vital not only to regional producers and Western energy consumers such as the United States, Europe, Japan and Australia, but to the world economy in general. Naval Mines Likely Method The only state likely to attempt to close the Strait of Hormuz is Iran; the best method available for it to do so is the use of naval mines. Indeed, Iran has threatened shipping in the Persian Gulf on a number of occasions and has already used mines to do so. During the socalled Tanker War phase of the Iran-Iraq War, Iran laid a number of naval mines in the Persian Gulf, one of which struck the USS Samuel B. Roberts, a patrolling United States guided missile frigate, resulting in the death of over 30 crewmembers. While the incident did not sink the vessel, nor did it take place in the Strait of Hormuz itself, it nevertheless demonstrated the vulnerability of shipping to mine damage. Despite advances in mine clearing and countermeasures, it is a vulnerability which still remains. With the obvious discrepancies between the Iranian and US military forces and the relative ease with which the US could destroy even the mobile batteries of anti-ship missiles installed along the Iranian shoreline, Iran s ability to close or, at least, threaten, the Strait of Hormuz hinges on its capacity to deploy mines. Hormuz Closure as a Negotiating Tool While it is not the purpose of this paper to delve deeply into the exact circumstances under which Iran may feel compelled to attempt to close the Strait of Hormuz, it is nonetheless worthwhile to note them at least briefly. The Islamic Republic s threats to close Hormuz are inextricably entwined with the country s nuclear programme. Tehran no doubt views this ability as an integral component of its negotiating strategy; while it may not yet actually possess a nuclear weapon, the capacity to cut off the lifeblood of the world economy is potentially despite the pitfalls of retaliation an ace up its sleeve. Speculation that Iran might attempt to close the Strait followed the declaration on 8 February 2010 by Supreme Leader and Commander-in-Chief, Ayatollah Ali Khamenei, that on 11 February (the 31 st anniversary of the Iranian Revolution), the Iranian nation will punch the arrogance (of the West) in a way that will leave them stunned. Some time previously, in August 2008, the commander of the Revolutionary Guard, Mohammad Ali Jafari, went on record as threatening to close Hormuz if negotiations over the nuclear programme did not go Iran s way. The United States is equally on the record, however, in stating that no country would be permitted to close the Strait, even if it had the capacity to do so, which the US felt that Iran lacked. Eighteen months on, analysts remain of the opinion that, despite its rhetoric, Tehran could still not actually close the Strait of Hormuz and that, as before, its best option would Page 2 of 5

3 be to instil fear into energy markets and consumers through disruption. By unsettling energy markets and pushing up marine insurance premiums with a few well-publicised detonations, even a relatively small quantity of mines could produce results. For Iran, the problem, of course, would be getting those mines into the shipping lanes under the watchful eye of the US Navy, which monitors the waterway very closely. Nevertheless, were Iran to succeed in laying the mines, they would continue to achieve results until such time as allied forces and commercial traffic could be certain that the shipping lanes were completely cleared as, despite technological advances, mine clearing remains a relatively slow and under-resourced process. In the absence of a nuclear arsenal, an ability either perceived or actual to close the Strait of Hormuz is therefore Iran s greatest weapon. Even the threat of closure would be sufficient to unnerve the global economy as it recovers from the global financial crisis, with prices for the region s oil and liquefied natural gas (LNG) products certain to rise, as would maritime insurance premiums. It is for that reason that some analysts, such as the Stratfor organisation, have described a threatened closure of the Strait of Hormuz as Iran s real nuclear weapon. It is an apt description because, as would be the case with using an actual nuclear weapon, closing the Strait of Hormuz would also ultimately inflict significant pain on Iran itself. That pain would most likely come in the form of retaliation from the United States or Israel possibly even from Iran s Arab neighbours not to mention additional damage to the already faltering Iranian economy. Effects of Closure In the hypothetical event that Iran were to successfully close the Strait of Hormuz, what might be the effects of that closure? To begin with, it is important to note that the following consequences, although speculative, are centred on what is very much a worst case scenario: that Iran has not only been able to close the Strait to all traffic, but that it is also able to maintain that closure for some time. A disruption or a brief closure would most likely result in a spike in the spot prices for oil and LNG that would lessen as mines were cleared and traffic returned to normal levels. A brief disruption would not be sufficient to produce the results below. In a worst case scenario, with the Strait of Hormuz closed for a lengthy period, the effect on the global economy would be significant. Deprived of its lifeblood, with oil and LNG supplies from the Persian Gulf severely curtailed or completely cut off, the global economy would be likely to contract once again in the face of higher energy prices. In such circumstances, the spot price per barrel of oil would quickly break through the US$ ($115.00) mark and would likely continue to rise until the Strait could be re-opened and normal supply resumed. The effects would be felt even more acutely in those economies still slowly emerging from the recent economic slowdown. As other analysts have noted, closing Hormuz during a recessionary period would at least in the very short term have provided Iran with the most bang for its buck, with the pain decreasing as the world moves further out of the recessionary cycle. For the US, however, as the world s largest energy consumer and stuck in a quagmire of 10 per cent unemployment and government deficits in the region of US$1.5 trillion ($1.7 trillion), the lengthy recovery process leaves it especially vulnerable. Page 3 of 5

4 That vulnerability is, however, the very reason why the US would not tolerate a closure of the Strait of Hormuz. Some oil and LNG could still leave the Persian Gulf via Saudi Arabia s East-West pipeline to the Red Sea port of Yanbu al-bahr, which has a capacity of five million bbl/d. The Abqaiq- Yanbu al-bahr LNG pipeline, running parallel to the East-West pipeline, has a capacity of 290,000 bbl/d and would facilitate LNG exports. Even at full capacity, however, the quantities would simply be insufficient to meet demand and offset the higher prices. Even in the event that Iran were unable to completely close Hormuz and succeeded in merely restricting traffic through the Strait, energy consumers would still face higher prices due to curtailed supply and as a consequence of the higher insurance premiums levied by marine insurers for any vessels attempting the passage. For Iran, already dependent on imported petroleum and with a stagnating economy largely dependent on oil and gas exports, closing the Strait of Hormuz would be a risky strategy. It might very well invite direct military retaliation from the US or Israel or even a coalition force potentially resulting in the loss of military personnel and assets, infrastructure and, perhaps, the destruction of the country s nuclear facilities. Even if Iran closed Hormuz with the intention of allowing its own exports through, the US and its allies would be certain to prevent Iranian vessels from leaving the Persian Gulf. For Tehran, the sole plus-side of any retaliation would be an increase in support from other anti-american groups for its selfproclaimed role in fighting what it terms the Great Satan. It may also be able to garner condemnation of any US or Israeli actions from a number of United Nations members, possibly even including Security Council heavyweights, Russia and China. Were Iran to successfully close Hormuz, the response of the wider international community would certainly include economic sanctions. Regardless of any rhetoric coming out of Tehran, sanctions would hit the Iranian economy hard, particularly since the subsidised price of petroleum would have to rise substantially to compensate for the lack of imported product. With Iranian motorists being restricted in the quantity of subsidised petroleum they can purchase each month as of December 2009, it is possible that prolonged and large-scale economic hardship could eventually undermine the regime by acting as a further catalyst to the anti-government protests which have occurred since the disputed 2009 presidential election. This would particularly be the case if the country s poor and rural populations, the strongest supporters of populist president Mahmoud Ahmadinejad and those most likely to be hardest hit, were to tire of the continually straitening circumstances and turn against the government. The vastly reduced income resulting from an economy based on oil and gas exports, but cut off by economic sanctions, would also curtail Iran s ability to fund its proxies operating around the region, such as Hezbollah in Lebanon, Hamas in the Gaza Strip and, allegedly, the al-houthi insurgents in Yemen. For Arab governments, Israel and the US, that at least would provide a welcome degree of breathing space. As a significant oil producer and the world s largest exporter of LNG, the effect of a Hormuz closure on Qatar would be negative in the extreme. Although beginning to successfully Page 4 of 5

5 diversify into areas such as tourism and financial and educational services, the Qatari economy remains based on the export of hydrocarbons, which has given the country the world s highest per capita Gross Domestic Product. 1 Unfortunately for Qatar, in order to achieve that high standard of living, its oil and LNG must first navigate the Strait of Hormuz, the closure of which would deprive it of over 80 per cent of its export earnings. Similar fates also lie in store for the oil-based economies of nearby Kuwait, Bahrain, the United Arab Emirates (UAE) and Iraq. The Habshan-Fujairah pipeline, if it were completed prior to a Hormuz closure, would provide the UAE with an economic lifeline capable of bypassing Hormuz and delivering 1.5 million bbl/d to the Gulf of Oman. For Iraq, the loss of oil income would come as a devastating blow to a government still working to stabilise the country and establish its authority. Baghdad might be able to counter that and reap the benefit of higher spot prices by exporting some of its oil through Turkey via the Kirkuk-Ceyhan pipeline (which requires significant upgrading to carry its full capacity) and through Syria via the Kirkuk-Banias pipeline (which would have to be repaired before it could be re-opened). For non-persian Gulf hydrocarbon producers, the higher spot prices resulting from a Hormuz closure would deliver a significant windfall, which could help to offset the attendant decline in the world economy. In Venezuela, for instance, the government of President Hugo Chávez is, like its Iranian counterpart, overseeing a steadily declining economy and would no doubt be pleased to have its depleted coffers replenished. While an Iranian attempt to close the Strait of Hormuz appears unlikely and its capacity to actually carry it out for any period of time even less likely, the Iranian Government remains aware of the pain it could inflict on its enemies if it chose to do so and, indeed, has actually threatened to do just that. Its best option would be disruption via the laying of mines. A sustained full-scale closure, which would have serious consequences for the global economy, would be much more difficult to achieve. Unfortunately for Iran, those consequences would also extend to the Islamic Republic itself, transforming an ace up the sleeve into an own goal. Published by Future Directions International Pty Ltd. Desborough House, Suite 2, 1161 Hay Street, West Perth WA 6005 Australia. Tel: +61 (0) Fax: +61 (0) lluke@futuredirections.org.au Web: 1 Calculated by the International Monetary Fund on a purchasing power parity (PPP) basis. Page 5 of 5