Mediocrates
09-05-2006, 04:59 PM
http://www.memri.org/bin/opener_latest.cgi?ID=IA29206 If Attacked—Iran's Options Reassessed
By: Nimrod Raphaeli Introduction
In a long series of speeches by, and live television interviews with, its most senior political and military leaders Iran has warned in no uncertain terms that, if its nuclear facilities were attacked by the United States, it will deliver a decisive blow to the attackers. To accentuate its threats Iran put on display a whole range of new weaponry systems, including locally built small submarines, flying boats, underwater missiles and mining capability, shore to sea missiles and thousands of small armed boats. While Iran may have a range of options, both military and otherwise, to retaliate against an attack on its nuclear program, it has so far identified one of these options, namely the closing of the Straits of Hormuz for the passage of oil tankers (please see Appendix). Iran’s other option is to destabilize the situation to such a degree that it will be difficult for the U.S. to maintain its presence in the country.
A. Implications of the Closing of the Straits of Hormuz
The Straits of Hormuz is a narrow, strategically important stretch of ocean between the Gulf of Oman in the southeast and the Persian Gulf in the southwest. On the north coast is Iran and on the south coast is the United Arab Emirates and Musandam, an exclave of Oman. On average between 15 and 16.5 million barrels of oil transit the Straits of Hormuz each day, roughly 25 percent of the world’s daily oil production (table 1).
Table 1: Oil Production by Gulf Countries in millions of barrels/day (bbl/d) (July 2006) Country
million bbl/d
Iran
4.05
Iraq
1.77
Kuwait
2.25
Qatar
0.84
Saudi Arabia
9.41
United Arab Emirates
2.60
Total
20.92
World Production
(2006 5-month Average)
84.52
Gulf production as a
Percentage of world production
24.75
The production figures equal exports plus domestic production. In the case of Iran, of the 3.75 million bbl/d average production, about 1.5 million bbl/d goes for domestic consumption.
In the case of Saudi Arabia, only about 60 percent of its oil exports go through the Persian Gulf (see above). Nevertheless, the implications for the closing, or even the threat of closing, of the Straits would have significant impact on the global energy market and on the price of crude oil. There will also be serious implications for Iran itself as the interruption of Iranian exports could have severe consequences for the Iranian economy.
The Implications for the Global Market
Crude oil prices behave much as any other commodity with wide price swings in times of shortage or oversupply. The closing of the Straits for the passage of tankers will create a severe shortage that would undoubtedly send shock waves both to the spot and future energy markets already beset by tight supplies and a limited spare capacity. It is anybody’s guess as to how high the price of crude oil could go if Iranian threats were materialized. Perhaps a comparison with the Arab oil embargo in 1973 during the Yom Kippur war might offer a hint. In 1972, the price of crude oil was about $3.00 per barrel and by the end of 1974 the price of oil quadrupled to over $12.00. It is far fetched to expect another quadrupling of oil prices from its present historically high price of $70-75 a barrel without triggering a world economic recession of untold consequences.
On the other hand, a sudden sharp drop in crude oil supplies and subsequent upsurge in prices will have a tempering effect on global demand through more effective conservation measures, particularly in the transportation sector. More importantly, having learned from the experience of 1973 embargo, most OECD member countries, including the United States, have built crude oil strategic reserves that could meet their consumption needs for at least six months. One should also mention the precautionary measures taken by Saudi Arabia, the largest crude oil exporter in the world, to militate against a future conflict in the Gulf.
The Implications for Saudi Arabia
Most of Saudi Arabia’s crude oil is exported from the Persian Gulf via the huge Abqaiq processing facility, which handles around two-thirds of the country’s oil output. Saudi Arabia’s primary oil export terminals are located at Ras Tanura (6 million bbl/d capacity; the world’s largest offshore oil loading facility) and Ras al-Ju’aymah (3 million bbl/d) on the Persian Gulf. However, Saudi Arabia operates two major pipelines. The East-West Crude Oil Pipeline (Petroline) which is used mainly to transport crude oil to refineries in the West Province and to Red Sea terminals for export to European markets. The petroline was expanded in 1987, during the height of the Iran-Iraq war (and specifically the "tanker war" in the Gulf), from its original capacity of 1.85 million bbl/d to its current capacity of 5.0 million bbl/d. The expansion of Petroline was constructed to maintain Yanbu, on the Red Sea, as a strategic option to Gulf port facilities in the event that exports were blocked at that end. Running parallel to the Petroline is the 290,000 bbl/d Abqaiq-Yanbu gas liquids pipeline which serves Yanbu’s petrochemical plants. In short, Saudi Arabia, the largest exporter of crude oil, will be only partly affected by the closing of the Strait of Hormuz.
The Implications for the United States
In the case of the United States, its strategic reserves will be supplemented by imported crude oil, much of it will not be affected by the closing of the Strait. The June 2006 figures for the five largest oil exporters to the United States in millions of barrels per day are Canada (1.1799), Mexico (1.1734), Saudi Arabia (1.427), Venezuela (1.008), and Nigeria (0.996). Other exporters to the U.S. are Iraq, Angola, Algeria, Ecuador and Russia. The U.S. produces about 5.2 million bbl/d. Venezuela, could shut off the supply in solidarity with the theocratic regime of Iran by the country’s socialist President Hugo Chavez who has missed no chance recently in aligning himself with forces of despotism. As pointed out earlier, the Saudi crude oil exports might also be affected but only partially. [1] (http://www.memri.org/bin/opener_latest.cgi?ID=IA29206#_edn1)
The Implications for Iran
According to the Energy Information Administration Iran’s economy relies on oil export revenues, with such revenues representing 80-90 percent of total export earnings and 40-50 percent of the government budget. Iran’s revenues from oil export in 2005 were $46.6 billion, projected to increase to $50.1 billion in 2006. These estimates are based on exports of 2.5 million bbl/d (barrel/day) of crude oil which are roughly the equivalent of 5 percent of world crude production. Total Iranian crude oil production is about 4 million bbl/d but with 1.5 million bbl/d going to domestic consumption. Before the revolutionary upheavals wrought by Khomeini Iran was exporting 6 million bbl/day, a figure which will not likely to be repeated without massive investments in the country’s oil facilities.
Iran has imported refined oil products since 1982, and these imports have been increased rapidly. Currently, Iran imports around one-third of its gasoline which, due to heavy government subsidies, sells for less than 40 cents per gallon in the domestic market, far below international levels, thereby encouraging waste and contributing to a rapid (8-10 percent per year) growth rate in gasoline consumption. In volume terms, Iran is the second largest importer of gasoline in the world after the United States. In 2005, Iran imported 150,000 bbl/d out of total consumption of 400,000 bbl/d. In 2006, Iran will consume 462,000 bbl/day and will import 188,000 bbl/d, or roughly 41 percent of total consumption. Iran buys its gasoline through a European oil trader, Vitol, with another 15 percent coming from an Indian refinery. (Aided by lax environmental regulations and cheap labor, India is building enormous refining capacity, much of its products are intended for export).
By: Nimrod Raphaeli Introduction
In a long series of speeches by, and live television interviews with, its most senior political and military leaders Iran has warned in no uncertain terms that, if its nuclear facilities were attacked by the United States, it will deliver a decisive blow to the attackers. To accentuate its threats Iran put on display a whole range of new weaponry systems, including locally built small submarines, flying boats, underwater missiles and mining capability, shore to sea missiles and thousands of small armed boats. While Iran may have a range of options, both military and otherwise, to retaliate against an attack on its nuclear program, it has so far identified one of these options, namely the closing of the Straits of Hormuz for the passage of oil tankers (please see Appendix). Iran’s other option is to destabilize the situation to such a degree that it will be difficult for the U.S. to maintain its presence in the country.
A. Implications of the Closing of the Straits of Hormuz
The Straits of Hormuz is a narrow, strategically important stretch of ocean between the Gulf of Oman in the southeast and the Persian Gulf in the southwest. On the north coast is Iran and on the south coast is the United Arab Emirates and Musandam, an exclave of Oman. On average between 15 and 16.5 million barrels of oil transit the Straits of Hormuz each day, roughly 25 percent of the world’s daily oil production (table 1).
Table 1: Oil Production by Gulf Countries in millions of barrels/day (bbl/d) (July 2006) Country
million bbl/d
Iran
4.05
Iraq
1.77
Kuwait
2.25
Qatar
0.84
Saudi Arabia
9.41
United Arab Emirates
2.60
Total
20.92
World Production
(2006 5-month Average)
84.52
Gulf production as a
Percentage of world production
24.75
The production figures equal exports plus domestic production. In the case of Iran, of the 3.75 million bbl/d average production, about 1.5 million bbl/d goes for domestic consumption.
In the case of Saudi Arabia, only about 60 percent of its oil exports go through the Persian Gulf (see above). Nevertheless, the implications for the closing, or even the threat of closing, of the Straits would have significant impact on the global energy market and on the price of crude oil. There will also be serious implications for Iran itself as the interruption of Iranian exports could have severe consequences for the Iranian economy.
The Implications for the Global Market
Crude oil prices behave much as any other commodity with wide price swings in times of shortage or oversupply. The closing of the Straits for the passage of tankers will create a severe shortage that would undoubtedly send shock waves both to the spot and future energy markets already beset by tight supplies and a limited spare capacity. It is anybody’s guess as to how high the price of crude oil could go if Iranian threats were materialized. Perhaps a comparison with the Arab oil embargo in 1973 during the Yom Kippur war might offer a hint. In 1972, the price of crude oil was about $3.00 per barrel and by the end of 1974 the price of oil quadrupled to over $12.00. It is far fetched to expect another quadrupling of oil prices from its present historically high price of $70-75 a barrel without triggering a world economic recession of untold consequences.
On the other hand, a sudden sharp drop in crude oil supplies and subsequent upsurge in prices will have a tempering effect on global demand through more effective conservation measures, particularly in the transportation sector. More importantly, having learned from the experience of 1973 embargo, most OECD member countries, including the United States, have built crude oil strategic reserves that could meet their consumption needs for at least six months. One should also mention the precautionary measures taken by Saudi Arabia, the largest crude oil exporter in the world, to militate against a future conflict in the Gulf.
The Implications for Saudi Arabia
Most of Saudi Arabia’s crude oil is exported from the Persian Gulf via the huge Abqaiq processing facility, which handles around two-thirds of the country’s oil output. Saudi Arabia’s primary oil export terminals are located at Ras Tanura (6 million bbl/d capacity; the world’s largest offshore oil loading facility) and Ras al-Ju’aymah (3 million bbl/d) on the Persian Gulf. However, Saudi Arabia operates two major pipelines. The East-West Crude Oil Pipeline (Petroline) which is used mainly to transport crude oil to refineries in the West Province and to Red Sea terminals for export to European markets. The petroline was expanded in 1987, during the height of the Iran-Iraq war (and specifically the "tanker war" in the Gulf), from its original capacity of 1.85 million bbl/d to its current capacity of 5.0 million bbl/d. The expansion of Petroline was constructed to maintain Yanbu, on the Red Sea, as a strategic option to Gulf port facilities in the event that exports were blocked at that end. Running parallel to the Petroline is the 290,000 bbl/d Abqaiq-Yanbu gas liquids pipeline which serves Yanbu’s petrochemical plants. In short, Saudi Arabia, the largest exporter of crude oil, will be only partly affected by the closing of the Strait of Hormuz.
The Implications for the United States
In the case of the United States, its strategic reserves will be supplemented by imported crude oil, much of it will not be affected by the closing of the Strait. The June 2006 figures for the five largest oil exporters to the United States in millions of barrels per day are Canada (1.1799), Mexico (1.1734), Saudi Arabia (1.427), Venezuela (1.008), and Nigeria (0.996). Other exporters to the U.S. are Iraq, Angola, Algeria, Ecuador and Russia. The U.S. produces about 5.2 million bbl/d. Venezuela, could shut off the supply in solidarity with the theocratic regime of Iran by the country’s socialist President Hugo Chavez who has missed no chance recently in aligning himself with forces of despotism. As pointed out earlier, the Saudi crude oil exports might also be affected but only partially. [1] (http://www.memri.org/bin/opener_latest.cgi?ID=IA29206#_edn1)
The Implications for Iran
According to the Energy Information Administration Iran’s economy relies on oil export revenues, with such revenues representing 80-90 percent of total export earnings and 40-50 percent of the government budget. Iran’s revenues from oil export in 2005 were $46.6 billion, projected to increase to $50.1 billion in 2006. These estimates are based on exports of 2.5 million bbl/d (barrel/day) of crude oil which are roughly the equivalent of 5 percent of world crude production. Total Iranian crude oil production is about 4 million bbl/d but with 1.5 million bbl/d going to domestic consumption. Before the revolutionary upheavals wrought by Khomeini Iran was exporting 6 million bbl/day, a figure which will not likely to be repeated without massive investments in the country’s oil facilities.
Iran has imported refined oil products since 1982, and these imports have been increased rapidly. Currently, Iran imports around one-third of its gasoline which, due to heavy government subsidies, sells for less than 40 cents per gallon in the domestic market, far below international levels, thereby encouraging waste and contributing to a rapid (8-10 percent per year) growth rate in gasoline consumption. In volume terms, Iran is the second largest importer of gasoline in the world after the United States. In 2005, Iran imported 150,000 bbl/d out of total consumption of 400,000 bbl/d. In 2006, Iran will consume 462,000 bbl/day and will import 188,000 bbl/d, or roughly 41 percent of total consumption. Iran buys its gasoline through a European oil trader, Vitol, with another 15 percent coming from an Indian refinery. (Aided by lax environmental regulations and cheap labor, India is building enormous refining capacity, much of its products are intended for export).