The disruption of the oil flow from the Persian Gulf

To assess the consequences of an interruption in the supply of oil from the Persian Gulf, we turn to an exercise that was played out on this scenario in Beijing.

By Lars Schall

The recurring tensions between Iran, the United States of America, Israel and Saudi Arabia must be followed by oil importers such as China and the EU with big worries, because if the supply of oil from the Persian Gulf were to stall, unprecedented price developments could be expected. Former senior US military official Lawrence Wilkerson took part in an exercise in Beijing in 2012 in which the supply of oil from the Persian Gulf was interrupted (“petroleum disruption exercise“). „We posited a terrorist attack against Saudi production, for example,“ Wilkerson explained later. „We had shippers and insurers participating in the exercise. – Lloyds of London and so forth – and the price of oil went out of sight. Four hundred dollars a barrel. Shippers wouldn’t ship, and insurers wouldn’t ensure.“ Wilkerson expressed concern about the fragile situation in the Persian Gulf, particularly with regard to Iran. A pre-emptive strike against the Iranian regime would lead to chaos in the region. “War, terrorism, oil delivery disruptions, and conflict that could stretch for decades would leave the U.S. with no choice for withdrawal. The global economy would go into a tailspin as prices of oil skyrocketed and supply became unreliable. This could lead to unforeseable consequences in global geopolitics. Wilkerson even sees Iran with nuclear capabilities as a better option. It would likely lead to Saudi Arabia buying a nuclear weapon from Pakistan, which would lead to a stabilizing stalemate in the region – a deterrent.“ (1)

With the agreement on Iran’s nuclear programme (JCPOA) and approval of the treaty by the United Nations Security Council in 2015, the danger of war seemed to be averted for the time being. But with US President Donald Trump’s unilateral withdrawal from the treaty roughly three years later and the gradually increased imposition of economic sanctions, the situation turned back to the opposite. (2) The numbers speak for themselves in the summer of 2019, while Trump’s neoconservative National Security Advisor John Bolton (ex-PNAC) and Evangelically-inspired Secretary of State Mike Pompeo eagerly stir the drums of war: “Iran was exporting 2.5 million barrels of crude a day before Trump unilaterally ditched the JCPOA. Last month Iran exported only 300,000 barrels a day. The Iranian economy grew 12.9% in 2016 after the UN Security Council signed the nuclear deal and lifted sanctions. This year, Iran’s economy under US sanctions will shrink by 6%. The rial collapsed by 60% over the past year. Inflation is up to 37%. Cost of food and medicine has soared by as much as 60%. This is war.“ (3)

A military confrontation with the Islamic Republic of Iran, brought about by Team Trump, seems increasingly likely to occur in these summer months of 2019. And thus also higher oil prices (and the associated effects on the world economy). After all, in the event that Iranian oil exports were to be stopped, Iran’s leadership had announced that it would close the Strait of Hormuz – which would prevent any oil shipments from leaving the Persian Gulf by sea route at all. (4)

SOURCES:

(1) Rauli Partanen, Harri Paloheimo, Heikki Waris: The World After Cheap Oil, Routledge, London / New York, 2015, pp. 59, 60-61. In a private statement in March 2019, Lawrence Wilkerson told the author that the „Petroleum Disruption Exercise“ was a „civil exercise“ conducted in the Ritz Carlton in the financial district of Beijing and jointly hosted by the Chinese Party School, Microsoft and Deloitte Touche (China). See further on the topic of a Persian Gulf oil flow disruption Philip K. Verleger Jr. “Impact of a Middle East Oil Export Disruption“, Business Economics, Vol. 47, No. 3, July 2012, pp. 197-201.

(2) According to statements made by former British Ambassador to Washington Kim Darroch, Trump is said to have withdrawn from the agreement „because it was associated with his predecessor Barack Obama“. See „Britischer Botschafter: Trump kündigte das Atomabkommen mit Iran wegen Obama“, Neue Zürcher Zeitung, July 14, 2019, under: https://www.nzz.ch/international/britischer-botschafter-trump-kuendigte-das-atomabkommen-mit-iran-wegen-obama-ld.1495830.

(3) Pepe Escobar in an email to the author in July 2019.

(4) “If Iran can’t export oil from Gulf, no other country can, Iran’s president says”, Reuters, December 4, 2018, under: https://www.reuters.com/article/us-oil-iran/if-iran-cant-export-oil-from-gulf-no-other-country-can-irans-president-says-idUSKBN1O30MI. See further “How Could Iran Disrupt Oil Flows in the Persian Gulf and Strait of Hormuz?“, GCaptain, July 11, 2018, under: https://gcaptain.com/how-could-iran-disrupt-oil-flows-in-the-persian-gulf-and-strait-of-hormuz/.

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