Iran oil doomsday in Hormuz may be more fear than reality

US strikes on several Iranian nuclear sites represent a meaningful escalation of the Middle East conflict that could lead Tehran to disrupt vital exports of oil and gas from the region, sparking a surge in energy prices. But history tells us that any disruption would likely be short-lived.

Investors and energy markets have been on high alert since Israel launched a wave of surprise airstrikes across Iran on Jun 13, fearing disruption to oil and gas flows out of the Middle East, particularly through the Strait of Hormuz, a chokepoint between Iran and Oman through which around 20 percent of global oil and gas demand flows.

Benchmark Brent crude prices have risen by 10 percent to over $77 a barrel since Jun 13.

While Israel and Iran have targeted elements of each other's energy infrastructure, there has been no significant disruption to maritime activity in the region so far.

But President Donald Trump's decision to join Israel by bombing three of Iran's main nuclear sites in the early hours of Sunday could alter Tehran's calculus. Iran, left with few cards to play, could retaliate by hitting US targets across the region and disrupting oil flows.

While such a move would almost certainly lead to a sharp spike in global energy prices, history and current market dynamics suggest any move would likely be less damaging than investors may fear.

CAN THEY DO IT?

The first question to ask is whether Iran is actually capable of seriously disrupting or blocking the Strait of Hormuz.

The answer is probably yes. Iran could attempt to lay mines across the Strait, which is 55km (34 miles) wide at its narrowest point. The country's army or the paramilitary Islamic Revolutionary Guard Corps (IRGC) could also try to strike or seize vessels in the Gulf, a method they have used on several occasions in recent years.

Moreover, while Hormuz has never been fully blocked, it has been disrupted several times.

During the 1980s Iran-Iraq war, the two sides engaged in the so-called "Tanker Wars" in the Gulf. Iraq targeted Iranian ships, and Iran attacked commercial ships, including Saudi and Kuwaiti oil tankers and even US navy ships.

Following appeals from Kuwait, then-US President Ronald Reagan deployed the navy between 1987 and 1988 to protect convoys of oil tankers in what was known as Operation Earnest Will. It concluded shortly after a US navy ship shot down Air Iran flight 655, killing all of its 290 passengers on board.

Tensions in the strait flared up again at the end of 2007 in a series of skirmishes between the Iranian and US navies. This included one incident where Iranian speedboats approached US warships, though no shots were fired.

In April 2023, Iranian troops seized the Advantage Sweet crude tanker, which was chartered by Chevron, in the Gulf of Oman. The vessel was released more than a year later.

Iranian disruption of maritime traffic through the Gulf is therefore certainly not unprecedented, but any attempt would likely be met by a rapid, forceful response from the US navy, limiting the likelihood of a persistent supply shock.

HISTORY LESSON

Indeed, history has shown that severe disruptions to global oil supplies have tended to be short-lived.

Iraq's invasion of neighbouring Kuwait in August 1991 caused the price of Brent crude to double to $40 a barrel by mid-October. Prices returned to the pre-invasion level by January 1992 when a US-led coalition started Operation Desert Storm, which led to the liberation of Kuwait the following month.

The start of the second Gulf war between March and May 2003 was even less impactful. A 46 percent rally in the lead-up to the war between November 2002 and March 2003 was quickly reversed in the days preceding the start of the US-led military campaign.

Similarly, Russia's invasion of Ukraine in February 2022 sparked a sharp rally in oil prices to $130 a barrel, but prices returned to their pre-invasion levels of $95 by mid-August.

These relatively quick reversals of oil price spikes were largely thanks to the ample spare production capacity available at the time and the fact that the rapid oil price increase curbed demand, says Tamas Varga, an analyst at oil brokerage PVM.

Global oil markets were also rocked during the 1973 Arab oil embargo and after the 1979 revolution in Iran, when strikes on the country's oilfields severely disrupted production. But those did not involve the blocking of Hormuz and were not met with a direct US military response.

SPARE CAPACITY

The current global oil market certainly has spare capacity. OPEC+, an alliance of producing nations, today holds around 5.7 million barrels per day in excess capacity, of which Saudi Arabia and the United Arab Emirates hold 4.2 million bpd.

The concern today is that the vast majority of the oil from Saudi Arabia and the UAE is shipped via the Strait of Hormuz.

The two Gulf powers could bypass the strait by oil pipelines, however. Saudi Arabia, the world's top oil exporter, producing around 9 million bpd, has a crude pipeline that runs from the Abqaiq oilfield on the Gulf coast in the east to the Red Sea port city of Yanbu in the west. The pipeline has capacity of 5 million bpd and was able to temporarily expand its capacity by another 2 million bpd in 2019.

The UAE, which produced 3.3 million bpd of crude oil in April, has a 1.5 million bpd pipeline linking its onshore oilfields to the Fujairah oil terminal that is east of the Strait of Hormuz.

But this western route could be exposed to attacks from the Iran-backed Houthis in Yemen, who have severely disrupted shipping through the Suez Canal in recent years. Additionally, Iraq, Kuwait and Qatar currently have no clear alternatives to the strait.

It is possible that Iran will choose not to take the dramatic step of blocking the strait in part because doing so would disrupt its own oil exports. Tehran may also consider any further escalation fruitless in light of US involvement and will instead try to downplay the importance of the US strikes and come back to nuclear negotiations.

In the meantime, spooked energy markets, fearing further escalation, are apt to respond to the US strikes with a sharp jump in crude prices. But even in a doomsday scenario where the Strait of Hormuz is blocked, history suggests markets should not expect any supply shock to be persistent.

[Ron Bousso is the Reuters Energy Columnist. He offers commentary on global energy markets and their intersection with geopolitics, the economy and everyday life]