Volatility in Middle East Gulfs may suck out 20% of global oil supply

Rising tensions between Iran and the U.S.A. may worsen the conflict situation in the Persian and Arabian Gulfs with the possibility of cutting off oil supply to both European and Asian markets.

This is because the current volatility could lead to a temporary closure of the Strait of Hormuz, between the Persian Gulf and the Gulf of Oman, which provides the only sea passage from the Persian Gulf to the open ocean and is one of the world’s most strategically important chokepoints.

Conservative estimates show of the world’s daily consumption of 100 million barrels a day of crude oil, 20 – 21 million barrels per day of crude and petroleum products are transported via the Strait of Hormuz.

Saudi exports are a vast part of it, but also the United Arab Emirates, Iraq, Kuwait, Bahrain, Qatar and Iran, will have to look at additional routes. A closure or military action in the region will cause a temporary disruption for all maritime traffic, said Cyril Widdershoven, an analyst at oilprice.com and a long-time observer of the global energy market.

“We are increasing our readiness. We can supply through the Red Sea and we have the necessary pipelines and terminals,” Amin Nasser, chief executive officer of the state oil company, Saudi Aramco had said as fear about a possible closure of the Hormuz looms in the wake of two tanker attacks in the Gulf of Oman earlier this month.

People familiar with the terrain said in reality, Aramco will not be able to keep the necessary crude oil and products volumes flowing to Asian and European markets in the case of a full Strait of Hormuz blockade. Although Aramco owns and operates a crude oil pipeline with a capacity of 5 million bpd, carrying crude 1,200 kilometres between the Arabian Gulf and Red Sea, much more is needed to keep the oil market stable.

Geographically, Tehran appears to have been dealt the best cards. 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 percent 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 opponents stability is a no-brainer in military strategy.

As a consequence, Asian consumers will need to prepare for severe price hikes in the most optimistic scenario, but also for a shutdown of vast parts of their economy. Hormuz will not be standing on its own; more is to be taken into account, especially proxy reactions in Yemen (Gulf of Aden) or East Med (Hezbollah).  Negative repercussions for Europeans are also in the picture.

This is the worst case scenario. But the general feeling of uncertainty about the Strait of Hormuz, which Iran has threatened to close a number of times in the past, the risk of the chokepoint being closed is probably non-existent whatever the tensions between Iran and the U.S.A. people with deep experience in the industry and regional politics have argued.