By Eric Vandenbroeck and co-workers

The New Oil Weapon

Despite a fragile cease-fire between the United States and Iran, the global economic crisis sparked by the closure of the Strait of Hormuz continues unabated. Dueling blockades have kept 20 percent of the global oil supply, 20 percent of the global supply of liquefied natural gas, and critical commodities such as helium, aluminum, and urea trapped inside the Persian Gulf, unable to reach markets. U.S. efforts to evacuate ships from the strait have been met with a renewed barrage of Iranian missiles and drones, and very few ships have managed to get through.

The economic impacts of this crisis have already begun to crystallize: shortages of fuels and other products in East Asia and Australia, skyrocketing jet fuel prices, and a drop in the global demand for oil for the first time since the COVID-19 pandemic in 2020. In the United States, gasoline has exceeded $4 a gallon and could break $5 by the end of May. Should the strait remain closed, these economic pressures will worsen, causing rising inflation and slowing GDP growth.

Iran’s ability to close the strait has been likened by political analysts to the “oil weapon” used by Arab oil producers against the West in the early 1970s. But in truth, the international system now faces a larger and more durable challenge than it did then. Even if Iran fails to institutionalize its control over the strait by establishing some kind of long-term toll system, it has proved that it can close the waterway to traffic even in the face of significant military force. 

This threat will hang over the global economy for the foreseeable future. It seems unlikely that the U.S. and Israeli military campaign will topple the Iranian regime; whatever eventual deal ends this round of conflict will almost certainly leave Supreme Leader Ayatollah Mojtaba Khamenei and his allies in the Islamic Revolutionary Guard Corps in place. If and when hostilities flare up again, Tehran will be able to lock down the strait. The U.S. should acknowledge and address this risk and not fall under the illusion that military force and diplomatic maneuvering can permanently solve this problem.

Despite a fragile cease-fire between the United States and Iran, the global economic crisis sparked by the closure of the Strait of Hormuz continues unabated. Dueling blockades have kept 20 percent of the global oil supply, 20 percent of the global supply of liquefied natural gas, and critical commodities such as helium, aluminum, and urea trapped inside the Persian Gulf, unable to reach markets. U.S. efforts to evacuate ships from the strait have been met with a renewed barrage of Iranian missiles and drones, and very few ships have managed to get through.

The economic impacts of this crisis have already begun to crystallize: shortages of fuels and other products in East Asia and Australia, skyrocketing jet fuel prices, and a drop in the global demand for oil for the first time since the COVID-19 pandemic in 2020. In the United States, gasoline has exceeded $4 a gallon and could break $5 by the end of May. Should the strait remain closed, these economic pressures will worsen, causing rising inflation and slowing GDP growth.

Iran’s ability to close the strait has been likened by political analysts to the “oil weapon” used by Arab oil producers against the West in the early 1970s. But in truth, the international system now faces a larger and more durable challenge than it did then. Even if Iran fails to institutionalize its control over the strait by establishing some kind of long-term toll system, it has proved that it can close the waterway to traffic even in the face of significant military force. 

This threat will hang over the global economy for the foreseeable future. It seems unlikely that the U.S. and Israeli military campaign will topple the Iranian regime; whatever eventual deal ends this round of conflict will almost certainly leave Supreme Leader Ayatollah Mojtaba Khamenei and his allies in the Islamic Revolutionary Guard Corps in place. If and when hostilities flare up again, Tehran will be able to lock down the strait. Washington should acknowledge and address this risk and not fall under the illusion that military force and diplomatic maneuvering can permanently solve this problem. 

The United States will need to open the strait in the next few months to avoid an even more serious economic crisis. This will likely require a combination of negotiations and pressure from the U.S. blockade. But over the long term, the United States needs to find ways to make sure that if Iran tries to close the strait again, the global economy will not suffer as it is suffering now. Washington should embrace strategies that build energy resilience and reduce exposure to future strait closures. It should also support efforts to expand shipping routes in Persian Gulf states and revive supply-side incentives to accelerate the energy transition both at home and abroad. Only by reducing its dependence can the United States undercut the strategic significance of the strait and rob Iran of its leverage.

 

Fool Me Once

The clearest parallel to Iran’s weaponization of the Strait of Hormuz is the 1973 Arab oil embargo, when the Arab members of OPEC cut oil production and banned oil shipments to the United States following the outbreak of war with Israel in October of that year. The embargo had a profound impact - causing severe gasoline shortages in the United States and contributing to a 400 percent increase in the price of crude oil globally - but its use as a policy tool proved to be short-lived. 

The oil embargo succeeded because the stars aligned in its favor. U.S. dependence on foreign oil had increased sharply between 1967 and 1973, and domestic production began to decline in 1970. This gave Arab producers unique leverage, which they did their utmost to weaponize. That leverage quickly receded, however. Non-Arab members of OPEC, led by the Iranian shah, Mohammad Reza Pahlavi, continued producing oil, undermining efforts to squeeze the market through production cuts. The oil embargo was lifted in March 1974, after weeks of negotiations between U.S. Secretary of State Henry Kissinger and Arab leaders. By 1975, real oil prices had fallen again, in part because of inflation. (A second shock from 1979 to 1980 caused prices to double yet again, but the cause was the sudden collapse of Iran’s oil production amid the Islamic Revolution rather than concerted action by producers.)

In the wake of the oil crisis, the United States and other industrialized economies developed tools for handling future shocks, the most important of which was a system of petroleum reserves that could act as a cushion against disruptions. No country or group of countries was ever able to successfully deploy the oil weapon again because OPEC and its Arab members were never again in a position to hold the global economy hostage.

By contrast, Iran’s success in the Strait of Hormuz is likely to prove more durable. The Islamic Republic has spent decades developing the capabilities needed to close the strait: mines, rockets, drones, antiship ballistic missiles, and a fleet of small, fast boats that can swarm and overwhelm passing ships. And it has succeeded in doing so with relatively little effort. Since February 28, Tehran has carried out more than 20 attacks on ships in waters surrounding the strait, according to the Joint Maritime Information Center, which monitors maritime traffic in the strait; coupled with depositing land mines in the strait and attacking onshore targets in Gulf states, this was enough to grind traffic to a halt. A month of heavy bombing by both the United States and Israel was not enough to force the strait open; naval escorts have proved challenging to arrange, given the reluctance of other countries to enter the conflict; and shippers remain unwilling to transit the strait owing to the high degree of uncertainty surrounding the cease-fire deal.

Having demonstrated it once, Iran can now credibly threaten to shut down the Strait of Hormuz in the future. Its military capabilities have been degraded but not destroyed. It would take little effort for Iran to deter shippers from resuming traffic. All it would have to do is lay a few more mines or launch small-scale attacks on passing ships. And should Iran successfully establish a tolling system and force every ship to pay a fee to pass through the strait or suffer possible attack, it is unlikely that military force could dislodge it from that position. Regional states, shipping companies, and international actors must now regard Iran’s threat as real, even if the strait is eventually reopened in the short term.

 

 

For updates click hompage here