Saturday, 5 October 2019

If Strait of Hormuz Blocked, Can Saudi Arab Overcome Oil Supply Crisis?


After 14/9 attacks on Aramco installations, some critics doubted the capacity of Saudi Arabia to guarantee adequate and uninterrupted oil flows to the market. The narrative of these analysts is not based on current situation but a temporary closure of the Strait of Hormuz, in case of a full blown war between Saudi Arab and Iran. They conclude, Saudi Arabia may be capable of doing a lot, but saving the global economy if the Gulf explodes is not one of its capabilities.
They say, Saudi Arab will not be able to keep the necessary crude oil and products volumes flowing to Asian and European markets in the case of blockade of Strait of Hormuz, even though Saudi Arab owns and operates a crude oil pipeline with a capacity of 5 million bpd, carrying crude 1,200 kilometers between the Arabian Gulf and Red Sea.
They also say, Saudi move to stabilize the current market is praiseworthy, especially just before the upcoming meeting of OPEC+ in Vienna. Saudi Arab has been saying that it is capable of supplying sufficient crude through the Red Sea, reiterating that the necessary pipeline and terminal infrastructure is there. These critics say, Saudi Arab can only assure its supply, which may be not higher this summer than around the level this pipeline can support. The real issue, if it comes to a full-blown conflict, is that not only Saudi oil is being threatened.
Reportedly, around 20 million bpd of crude and petroleum products are transported via the Strait of Hormuz, at present. Saudi exports are significant, but other countries include UAE, Iraq, Kuwait, Bahrain, Qatar and Iran, who will have to explore alternative routes. They warn, any military action in the region can cause a temporary disruption for all maritime traffic.
Besides the options that are the already on the table, such as the Saudi onshore pipeline and the UAE’s Fujairah pipeline, no other real alternatives are available, as overland trucking or rail transport is minimal. Transferring volumes via the Saudi and UAE’s pipelines is not an option at all, as the total capacity of the two is less than 10 million bpd, representing not even 50% of the current maritime flows through Hormuz. Another thing that should be noted is that pipelines can’t ship crude and crude products at the same time.
Another consequence of a blockade would be that most available VLCCs and other tankers will either be in the Persian Gulf and blocked or will not be able to be rerouted, before the market finds solution days and probably weeks will have gone by and a price spike for all products cannot be ruled out.
Only a few analysts are talking about oilfield security and pipeline availability. Any military advisor will put these options as part of his or her 1st phase military action plan. If Iran were to be attacked, or faces a surgical strike by an opponent, all Arab oil and gas infrastructure will become a legitimate offensive target, least in the eyes of Tehran and its proxies.
Looking at the majority of oil and gas production assets and infrastructure in the Arab world, especially in Saudi Arabia, UAE or even Iraq, everything is in reach of short-distance missiles, fighter jets, and even drones. Any move against Iran will result in a full-scale attack on Saudi’s Eastern Province, which produces 80% of all its oil and gas, Abu Dhabi’s offshore oil infrastructure and the regional pipelines. Looking at history, denying energy access and diminishing the opponent’s stability are on top of military strategy.
At present, oil market is a victim of geopolitical power projections of emotional leaders superseding rationality. The continuing references to Iran-Iraq tanker war during 1980-1988 is out of touch with reality. At this time, it is not going to be Iran denying support or trade with Iraq, but a possible Arab-Iranian confrontation, led by the US if no countermeasures are being implemented.

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