Tuesday, March 06, 2012

The Most Dire of Straits

The point that could choke the world

Executive Special Report

The prospect of a war against Iran has been on the cards for decades. Since 2005, innumerable media reports have proclaimed that war is imminent, and this year will be the year it will happen. Think tanks, war strategists, risk consultancies and the various militaries have all compiled papers on how a conflict in the Gulf could play out. The headline of a 2009 article on the website of the United States Army sums it up: “Future Gulf War: Arab and American Forces against Iranian Capabilities.”

What is fundamentally different now is that there has been a sustained covert war by unknown actors against Iranian nuclear facilities and scientists over the past few years — from scientists killed by car bombs on the streets of Tehran to mysterious “accidents” and cyber attacks at nuclear facilities — and that an economic war has essentially been declared through the heightened sanctions by the US and European Union (EU) in recent months.

Crucially, the oil sanctions, meant to hit Iran where it hurts given its budgetary reliance on hydrocarbons, have removed a major logistical obstacle to conflict, in that the EU, which imports 4 to 5 percent of its oil from Iran — some 600,000 barrels per day (bpd) — will not have to scramble for alternative energy sources in the advent of war; they are already doing so now.

While the sanctions are to go fully into effect by July, countries are already starting to abide by the decision; Britain, Austria, Poland and Portugal, for instance, cut their imports of Iranian crude to zero in the third quarter of 2011. Iran unilaterally halted exports to France and Britain last month and most international oil companies, with the exception of Asian firms, have also pulled out of Iran to abide by the new sanctions.

The US has not imported Iranian oil since the overthrow of the Shah in 1979, and its reliance on Middle Eastern oil is the lowest it has been in decades. From 2005 to 2011, the US’ overall oil imports have fallen from 60.3 percent of consumption to 47 percent, while from the Persian Gulf it has dropped by 26.7 percent to 18 percent of total imports by 2011, according to the US’ Energy Information Administration (EIA) figures.

But with the 30km-wide Strait of Hormuz the conduit for more than 20 percent of the world’s oil and 40 percent of traded oil on the markets, it is essential to the global economy that this oil keeps flowing. With almost 17 million bpd passing through the passage in 2011, the Iranians’ threat to block the Strait is taken very seriously. As oil expert Daniel Yergin notes in “The Quest”, his recent bestselling book: “the Strait is the number one choke point for global oil supplies.”

It has been a long-term goal of the US to ensure the Strait remains open, spending an estimated $6.8 trillion (including baseline costs such as training, pensions, long-term debt repayments and military base usage globally connected to the Gulf) between 1976 and 2008 projecting military force in the Persian Gulf, according to research by Princeton's Energy Policy department, averaging $492 billion annually between 2003 and 2008.

The US imported 663.2 million barrels from Saudi Arabia, Iraq and Kuwait in 2011. Through a rough calculation for 2011 using the five year annual average calculated above — $492 billion divided by 663.2 million barrels per year (b/y) — the US is paying $742 per barrel to ensure that this oil reaches its shores. When taking into consideration the 6.2 billion b/y that passes through the Strait annually, it is costing the “the world’s policeman” $79 a barrel to keep itself and everyone else in Gulf oil.

The US Department of Defense’s January paper “Sustaining US Global Leadership: Priorities for 21st Century Defense” states, “US policy will emphasize Gulf security, in collaboration with Gulf Cooperation Council countries when appropriate, to prevent Iran’s development of a nuclear weapon capability and counter its destabilizing policies. The United States will do this while standing up for Israel's security and a comprehensive Middle East peace.” The recent build up of naval activity can therefore be interpreted as the US reasserting its military dominance over the Gulf (see page 30). But with the oil supplies for the main cheerleaders for confronting Iran — the US, EU and Israel — largely cushioned to any disruptions in the Strait (not least due to massive stockpiles in the US and EU — see page 42), this has, more than ever, helped pave the way for the possibility of war.

Starving Asia

For Asian countries the situation is far more serious. Three-quarters of the Gulf's oil exports are destined for the East; the closure of the Strait or a Gulf conflict would effectively starve Asia of energy, which would have serious economic ramifications regionally and globally. How to placate China, Japan, South Korea and India has therefore been a stumbling block in the West's strategy to isolate Iran. Yet there is more at stake than energy imports. Russia and China were among the nine nations (out of 35) that voted against the International Atomic Energy Agency's (IAEA) Iran file in November which said the Islamic Republic had carried out activities “relevant to” acquiring a nuclear weapon. While Iranian and Gulf energy supplies were a likely factor behind China's “no”, Beijing is officially opposed to nuclear proliferation and has adopted a “studied neutrality” on Iran. China is concerned with US encroachment in what it perceives as its own back yard, according to Kerry Brown, head of the Asia Programme at the Chatham House in London. He adds that there is a deep conviction in China that American policy in the Gulf aims to keep Chinese interests at bay, causing the country to feel increasingly contained. Furthermore, by controlling the Gulf, the US is able to use energy as a bargaining chip with China and other Asian countries.

“Asian demand is rising exponentially; the US having oversight of the Persian Gulf means an inside track when it comes to the Asian powers, and a prize the US is not going to give up like Britain following the 1958 Suez Crisis; the US has learned its lessons,” said Professor Anoush Ehteshami, head of the School of Government and International Affairs at Durham University in England. “Indicative is the US is buying less oil from Saudi Arabia than in the past 20 to 30 years but the relationship is stronger than ever.”

Annoying the neighbors

The formidable Russian bear has been vexed and unsettled by some US regional strategies, facing encroachment in Eastern Europe from NATO’s planned deployment of a missile defense system, and in Central Asia from the large US military presence in Afghanistan. While Russia does not rely on Gulf oil and would stand to gain from rising oil prices upon the closure of the Straits, regime change in Tehran would equal the loss of a geo-strategic and non-aligned partner, and open the way for Russia to be circumvented as an energy corridor to the Caspian Sea and Central Asia, home to 48 billion barrels of oil and 449 trillion cubic feet of natural gas, according to statistics from BP.

Such a scenario would likely raise the hackles of Moscow and Beijing alike. Their grievances would only be compounded by their strategic setbacks in Libya where they curried particular favor with the former Gaddafi regime, and the current risk, especially to Moscow, of the fall of Bashar al Assad. Already the Russians have lost $4.5 billion in weapons contracts in Libya, according to the Moscow-based Center for Analysis of World Arms Trade (CAWAT), while $18.8 billion worth of contracts with Chinese companies are now in jeopardy, according to official Chinese statistics. Furthermore, the Russians could have already lost $13 billion from the effect of a United Nations arms embargo on Iran according to CAWAT, and face billions in losses from cancelled weapons contracts with Syria where it has already invested more than $20 billion in the infrastructure, energy and tourism sectors, according to the global analysis and advisory firm Oxford Analytica. That’s enough to make any bear irate enough to start a fight, and arguably the main reason why there is a lot more at stake than just the flow of oil out of the Gulf being interrupted.

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