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Immediate threat to Gulf oil flow lifted

The UK and Iran have shown that they do not want the seizure of a British-flagged oil tanker to be the trigger for an armed conflict

The decision by members of Iran's Islamic Revolutionary Guards Corps to board the Stena Impero off Oman and force it to sail to Bandar Abbas might well have been the spark to ignite a war in the Gulf. In the event, the UK and Iranian governments are showing clearly that they do not want this to happen.

The UK's foreign minister, Jeremy Hunt, while describing the seizure of the tanker as an act of piracy, stressed his country's "desire to de-escalate" the crisis. Instead of direct military action to resolve the tanker issue, he proposed working with other European nations to work out a joint strategy to protect ships passing through the Strait of Hormuz.

Iran's foreign minister, Mohammad Javad Zarif, said Tehran was not seeking war and wanted to "rebuild good relations" with the UK.

While global oil prices rose in the wake of the tanker seizure—the latest in a string of incidents involving the targeting of energy transport and infrastructure in the Gulf region—there was no dramatic spike. Seeking to calm nerves further, the International Energy Agency (IEA) said on 22 July that it was "closely monitoring developments in the Strait of Hormuz, including the recent seizure of a UK-flagged oil tanker, and stands ready to act if needed".

The waterway is, in the IEA's words, "a vital maritime transit route for world energy trade"—with around 20mn bl/d of oil (20pc of global supply) passing through the strait. But the statement went on to say that "consumers can be reassured that the oil market is currently well supplied, with oil production exceeding demand in the first half of 2019, pushing up global stocks by 900,000bl/d".

The IEA stressed that there is sufficient oil "to cover any disruptions in oil supply from the Strait of Hormuz for an extended period." IEA countries hold 1.55bn bl of public emergency oil stocks, in addition to the 650mn bl held by industry under government obligations. 

In the Arab Gulf states, most of which have encouraged US efforts to target Iran with sanctions and military threats, there appears to be a growing hope that the combined pressure will be sufficient to avoid conflict. The influential Saudi daily Al-Riyadh on 23 July carried a prominent front-page headline saying: "The tankers war: Iran knows the time has come to bring it to an end." The article went on to say that while for decades Iran has carried out acts of terror with impunity "now everything has completely changed. The whole world stands united, united by the US, the UK, Saudi Arabia and other major nations," against Tehran's strategies.

Arab Gulf states hope that pressure will both avoid war and force a change in Iranian policies. But at the back of the minds of Gulf leaders is the unsettling possibility that the Trump administration may eventually seek to reach a deal with Iran ahead of the 2020 presidential elections that falls short of changing attitudes in Tehran. Achieving a foreign policy success that brought Iranian oil back into the global markets and caused a significant fall in oil prices—and US domestic gasoline prices-might be a tempting vote winner.

For Arab Gulf states, urgently needing maximum revenue to invest in projects aimed at loosening the dependence on oil, a price collapse would be disastrous.

Source: Petroleum Economist
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