Oil analysts are jittery this week following comments on Sunday by Vice President Joe Biden that were widely interpreted as a green light to Israel to bomb Iran's nuclear facilities. Many in the industry have long viewed such an attack as a prelude to a nightmare in global energy markets: Iran retaliating by sinking oil tankers in the Strait of Hormuz, blocking the route by which most Persian Gulf oil travels to world markets. "We will be in deep, deep trouble," says Leo Drollas, deputy director and chief economist of the Center for Global Energy Studies in London. "The market will go berserk."
The Obama Administration has hastened to correct the impression that Biden's comments represented a U.S. nod and wink to an Israeli air strike. The Vice President had said that while the U.S. believes that military action against Iran would serve neither American nor Israeli interests, Israel is a sovereign nation, and if it felt threatened by Iran, it would be "entitled to" launch an attack on the Islamic Republic "whether we agree or not." President Obama reiterated in Moscow on Monday that he opposes military action against Iran and instead wants a diplomatic solution to the nuclear standoff. But Prime Minister Benjamin Netanyahu has long maintained that Israel reserves the right to take matters into its own hands if U.S. diplomacy fails to deliver results.
Biden's comments caused a stir precisely because U.S. officials have scrupulously avoided making comments that Iran might interpret as a green light from Washington for an Israeli strike. "That leads me to infer that [Biden's] was a planned statement," says Cliff Kupchan, director of Europe and Eurasia at the Eurasia Group, a risk consultancy in Washington. "It is very rare for any U.S. official, [much] less the Vice President, to make concrete comments on the possibility of an Israeli military strike on Iranian nuclear facilities." Kupchan warned in a note on Tuesday that Iran could interpret Biden's remarks as "a proxy threat to ratchet up pressure ... and [Tehran could] react aggressively."
And it's that possibility that's causing anxiety among oil analysts who believe that the quickest asymmetrical means for Iran to react to a military threat would be to disrupt oil delivery. At least 20% of the world's entire oil supply passes through the narrow Strait of Hormuz that runs between Iran and the United Arab Emirates and Oman. Qatar, Kuwait and the U.A.E. ship all their oil through the waterway, while Saudi Arabia the world's biggest producer exports half its oil through the strait, the remainder going overland through a pipeline. Since the strait's narrowest point is just 29 nautical miles wide, sinking a couple of tankers may be for Iran a preferable option to launching direct military retaliation against Israel, for which the consequences could be far harsher.
Even if U.S. Navy warships quickly stepped in to keep the waterway open, traders and tanker captains would be spooked, and the cost of transporting oil would rise sharply. "It is a scenario anyone who looks at security of supplies considers," says David Fyfe, head of the oil-markets division at the International Energy Agency in Paris, which represents oil-consuming industrialized countries. "It would affect up to 12 million bbl. of oil a day."
The last serious disruption in global supplies came 30 years ago, during Iran's revolution, when oil-field workers joined a national strike, effectively taking Iran's 6 million bbl. a day off global oil markets. Back then, Iran's exports accounted for 10% of the world's oil supplies compared with just 5% today. World oil prices tripled in nine months, from $12.80 a bbl. in September 1978 to $34.40 in June 1979, at the height of the Iran hostage crisis.
Despite the renewed threat of disruption, major oil-consuming countries are in a strong position to withstand any new market shocks. Global stockpiles are at their largest in about five years because of the downturn in demand brought on by the recession. Many countries also created large strategic oil reserves after the 1979 experience. And in an effort to stabilize oil prices, both the U.S. Congress and the Obama Administration are considering clamping down on speculation in energy futures, said Gary Gensler, chairman of the U.S. Commodity Futures Trading Commission, on Tuesday. Speculation is one factor believed by economists to have contributed to the turmoil in oil prices that saw them hit a high of $147 a bbl. last July and then drop to $33 just six months later. It traded on Tuesday at about $63 a bbl.
Some analysts believe that a bigger problem may be consumer panic. Drivers, who on average have one-third of their tank filled, could rush out to fill their tanks, effectively tripling the demand for gas. That alone would send oil prices soaring. So, too, would speculation by investors who predict a drop in supplies. "Prices will rise, and people will buy futures," says Drollas. "Traders will buy because they are worried about their supplies." All that could send market prices rocketing and deepen the global recession. It remains to be seen whether the market remains calmed by Obama's reassurances this week that military action against Iran is not on the agenda.