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Wikileaks stokes tension in the Mideast Gulf

Hawks in the Mideast Gulf and the US think war with Iran is both necessary and inevitable. But what would this do to the oil price – and the world's economy – asks Miles Lang

Energy map of the Middle East and Caspian

SENIOR Gulf Arabs have been urging the US to make war on Iran. The United Arab Emirates (UAE) has built a pipeline to bypass the Strait of Hormuz. The Arab states are expanding their arsenals. Hawks in the US insist that the only way to stop President Mahmoud Ahmadinejad's quest for a nuclear bomb is to flatten his country.

It is a combination that could unleash another war in the Gulf. This would be a human disaster. But the impact on oil supplies, and the global economy, could be no less profound.

Around 20% of the world's crude supply – some 17m barrels – passes through the Gulf every day. Added to that, Qatar and Abu Dhabi ship over 22% of the world's liquefied natural gas (LNG) – a combined 56.5bn cubic metres in 2009, according to Cedigaz – through the same waters. A conflict would affect shipping routes, as well as offshore production infrastructure.

Some commentators now say war with Iran is inevitable and are even putting a date on when it will happen. David Hartwell, an analyst from IHS Jane's, a security consultancy, says that while US President Barack Obama's administration and the US military have little appetite to fight a third war now, things could change after 2013. By then, a new US president – or a bolder version of the one in the White House now – will be in power. Israel's prime minister Benjamin Netanyahu will also be going to the polls and may feel an attack on Iran would firm up his electoral base.

Just seven years after misleading intelligence and a hawkish US administration brought a controversial and devastating war to Iraq, it seems inconceivable that political momentum may be moving for more US adventurism in Iran. Despite widespread international condemnation of its weapons programme, moreover, Iran maintains that its nuclear ambitions extend to nothing more sinister than electricity generation.

But that is a version that is distrusted across the Gulf. There, influential members of the ruling elites increasingly see war to stop Iran as necessary, or even desirable. "A military attack on Iran would be a disaster," Yousel al Otaiba, the UAE's ambassador to the US, said in July. "Iran with a nuclear weapon would be a bigger disaster." He added that he would be "absolutely" willing to "absorb what takes place" to make the UAE more secure.

Al Otaiba's comments were quickly swept-up by his government, with the foreign minister saying they were "inaccurate" and "taken out of context". But many ruling-class Gulf Arabs have grown keen on a war against Iran, as the evidence that surfaced in November's Wikileaks dossier of classified US diplomatic cables shows (see box). Indeed, Saud al-Faisal, Saudi Arabia's foreign minister, has said that while UN sanctions against Iran may work in the long term, his country wants a more "immediate" resolution.

Comments like these, and the others to be found in the recent Wikileaks dossier, are hardly unusual among senior Gulf Arabs when they speak privately. What was surprising about Al Otaiba's comments was not what he said, but that he said it in public.

Sooner or later, says Christian Koch, director of international studies at the Gulf Research Center in Dubai, the Arab states believe they will reach a point where the choice is Iran with a nuclear weapon, or a military strike to prevent that from happening. "When it comes to that," he says, "we'll take the latter."

Retaliation

Iran knows that any attack could stop its oil exports. In response, it says, it will shut down the Gulf. In August, Ali Shademani, an Iranian general who is head of operations of the joint chiefs of staff, said that his country's armed forces were in "the highest state of preparedness" to shut the Strait of Hormuz, the natural chokepoint between the Mideast Gulf and the Gulf of Oman.

Mustafa Alani, director of security and terrorism studies at the Gulf Research Center, says Iran would also attack offshore production and export platforms belonging to the UAE, Kuwait and Qatar. Tankers in the waters would also be a target, he says.

But he also claims the attacks would be short-lived, given the combined US and regional forces amassed in the Gulf – which also happen to have studied the likely course of such a response from Iran. They expect some collateral damage, says Alani, and have focused on minimising it.

Nonetheless, oil and LNG shipments would be shut in for the duration of any conflict – a thought that should give the hawks pause for thought. Military experts thought the last war in the Gulf, against Saddam Hussein, would also be a short affair, a failure that ought to make outsiders sceptical of their claims.

It is safe to say an attack on Iran and its consequences would send the oil market soaring, even if some traders have long priced an "Iran premium" into their market view. Although few analysts are willing to put an exact figure on where crude prices would peak, one respected Gulf oil specialist reckons a jump to $150 a barrel, or beyond, would be plausible. That is a harrowing thought for the global economy, which continues to stutter while oil prices hover around $80/b (PE 11/10 p12).

Past conflicts offer some clues. In June 1990, during an era of oil-supply abundance, prices jumped from around $17/b to more than $25/b after Iraq invaded Kuwait. By October, the market had tested the mid-$30s, a near-doubling over three months. This price spike, which reflected a drop in production and uncertainty about the safety of the Gulf waters, did not last long, but it hit the markets hard. Many economists say it helped cause the recession of the early 1990s.

Even if Arab exporters continued to ship through the Strait of Hormuz, it is likely that Iran's own exports would cease, withdrawing 2.3m barrels a day (b/d) from trade. Yet that volume would be easy to replace, says Alani. The combined spare production capacity of Saudi Arabia and the UAE stands at around 5m b/d, and could be brought on stream within a matter of weeks. Damage to Gulf Arab infrastructure would probably be limited to offshore installations, rather than affecting big onshore production and export infrastructure.

"The market will show an immediate psychological reaction," says Alani, "as it did during past Gulf conflicts – but this will not last."

Meanwhile, there are other signs that the Gulf is expecting war. Saudi Arabia, the UAE, Oman and Kuwait are re-arming, and will spend around $122bn on US-manufactured weapons over the next four years. Saudi Arabia will spend more than half of this, adding fighter jets, helicopters and missile-defence systems to its arsenal. It wants Iran to know that in the event of conflict it would have total aerial superiority.

Pipeline potential

But it is not just new weapons systems that Gulf Arab states are putting in place. More peaceful efforts to ensure security of oil supply include two pipelines: Saudi Arabia's expanded 5m b/d Petroline, which runs from Abqaiq on the Gulf, to Yanbu on the Red Sea; and the UAE's 1.5m b/d Abu Dhabi Crude Oil Pipeline (Adcop), which runs from the onshore Habshan field, east to the port of Fujairah, on the Gulf of Oman. Adcop, completed in November, is running on a trial basis. It was designed in 2006 as a hedge against the Strait of Hormuz being blocked.

Adcop and Petroline together will be able to move 6.5m b/d of crude at normal rates. If drag-reduction agents – long-chain polymers introduced to the flowing crude – were used to speed the flow, the two pipelines could have a combined capacity of 10.5m b/d, or more than 60% of the 17m b/d that pass through the Strait of Hormuz.

The port of Fujairah has been used for decades as a refuelling point for tankers and is being expanded to include large-scale liquids-storage facilities. Making Fujairah, on the east coast of the UAE, an export point rather than a logistics hub is a sound strategic move by a country worried about the security of the Strait of Hormuz. For good measure, the UAE opened a naval base there in October.

Of course, the most prudent way to keep the energy supplies flowing is to avoid war altogether. Much will depend on politics in the US, and how durable is the sharp turn to the right seen there in November's congressional elections. The confidence or frailty of the US military, possibly bruised by longer-than-expected conflicts in Iraq and Afghanistan, will also be a factor. Tighter international sanctions on Iran and the state of internal opposition in the country could yet bring a change of course in Tehran.

Some influential US bodies are not, however, considering that – and already talk of a war with Iran as almost inevitable. Simon Henderson, director of the Gulf and Energy programme at the Washington Institute for Near-East Policy, reckons that when the dust settles after "a lot of smoke and noise for 10 days or two weeks" Iran will have been "humiliated". US forces have been plotting the exercise for many years, he says. "They know they can do it. And they would." With powerful members of the Gulf's Arab elite also evidently enthused by such a prospect, it adds up to a worrying picture for the region.

Yet for all the historical enmity between the Gulf's Arab and Persian sides, there are still grounds for co-operation, especially if sanctions bring Iran back to the negotiating table. Opec, often a forum for dispute, also ensures its members at least keep communicating. None of the group's producers would welcome another oil-price spike, which would bring more demand destruction and hit the global economy while it is already down. For all the talk in the Gulf about another conflict, war with Iran would not just be a disaster for that country, but for the region too.

"Cut the head off the snake"

THE LEAKING by Wikileaks of diplomatic cables shows senior leaders of Gulf Arab states pleading for war with Iran. Leaders in Saudi Arabia, the UAE and Egypt describe Iran as "evil", an "existential threat" and a power that "is going to take us to war".

Saudi Arabia's King Abdullah bin Abdulaziz has repeatedly urged the US to attack Iran to destroy its nuclear programme. He is quoted as having told US general David Petraeus to "cut the head off the snake" during a meeting in April 2008.

In 2009, King Hamad ibn Isa Al Khalifa of Bahrain said Iran's "[nuclear] programme must be stopped by whatever means necessary". He added: "The danger of letting it go on is greater than the danger of stopping it."

Jordanian Senator Zaid Rifai said in 2009 that the US should "bomb Iran, or live with an Iranian bomb", adding that "sanctions, carrots, incentives won't matter".

Qatar is often seen as the Gulf Arab state most friendly with Iran. But Hamad bin Jassim Jaber al-Thani, the country's prime minister, is revealed to have said: "They lie to us, and we lie to them."

Mideast Gulf map

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