FREE

The Hormuz Factor

The first half of 2012 was dominated by high political and diplomatic tensions with Iran and the associated threat of closing down the Strait of Hormuz, one of the main arteries of international oil trade. In discussing the topic, the article combines a geopolitical perspective with a military one, which analyses Iran’s ability to threaten the sea lanes of the Persian Gulf, its military capabilities to mount irregular warfare in these waters and how these can be counteracted by the western military power projection existent in the region. The high appetite for risk of the Iranian regime and its disposition for brinkmanship strategies could increase with the achievement of the nuclear-armed country status, so as the likelihood of a blockade or coercive military action in the Strait of Hormuz. Although a closing of the Strait is considered unequivocally a “red line”, whose crossing will not be tolerated, the Strait’s safety as a key transit point for energy commodities will be influenced by developments in the Iranian nuclear dossier. One thing remains certain: in times that favor the ‘forces of denial’, policing and securing the energy traffic in the Strait of Hormuz becomes increasingly difficult.

The Strait of Hormuz, which separates the Persian Gulf from the Indian Ocean, is the world›s most important oil choke-point due to its daily oil flow of almost 17 million barrels. Last year 20% of world’s oil supply and 40% of all the oil traded globally flowed through the Strait. According to Energy Information Administration (EIA), around 85% of these crude oil exports went to Asian markets, especially Japan, India, South Korea, and China. Six Middle Eastern petroleum producers export through this Strait: Saudi Arabia, Iraq, Kuwait, UAE, Qatar and Iran itself. This strategic trade route has also a major importance for the transit of LNG, given the fact that the Gulf is home to the world’s largest offshore gas field (North Field/South Pars) shared by Qatar and Iran. Consequently, a quarter of the global LNG supplies pass through Hormuz, “the majority being some 77 million tons per year of Qatari LNG shipments destined for Asian and European markets” (Oxford Institute for Energy Studies, 2012).

Thus, the slightest sign of instability in the region can send the global oil (and gas) prices through the roof. Suffice a look at the oil price graph below to enforce the direct and strong link between regional saber-rattling and oil prices, in this case – the volatility of the Brent crude in the first 7 months of this year, in light of the concerted U.S. and European measures targeting Iran (U.S. financial sanctions signed last December and the European Union (EU) ban on oil imports of Iranian origin announced in late January).

Although the U.S. measures came in force on June 28 and the EU ban didn’t take full effect until July 1^st, these will inevitably alter the oil supply landscape (Platts). Traditional buyers of Iranian crude (Italy, Spain, Greece, Turkey, Japan, South Korea) already reached out to other producers to replace some of the Iranian barrels. New off-take contracts were concluded and by summer the markets have calmed down and the Brent crude price dipped below 100 USD/bbl. But even for the non-Iranian crude, the main gateway to the world markets is via Hormuz, while for LNG it is the only available access point. The currently available alternative options for circumventing the Straits are few and insignificant in terms of aggregate spare capacity that could be used to reroute oil that passes through the Strait (see below), despite some recent capacity additions like the new Habshan-Fujairah pipeline, which became operational this June. Assuming the entire existent operational pipeline infrastructure would be available for rerouting (which we know is not), it could offer an alternate route to only about half of the 17 Mbpd currently transiting the Strait by tankers. For LNG, there would be no outlet alternatives.

Oil pipelines which could be used as alternative outlets:

• Trans-Arabian pipeline/Tap-line (runs from Qaisumah to Sidon, Lebanon. Built in the 1940s with a 500,000 Bpd design capacity, pipeline is not operational. The Lebanese portion was closed in 1983 while the Jordanian sector (some 50,000 bpd) in 1990);
• Kirkuk-Ceyhan/Iraq-Turkey pipeline (1.5 Mbpd capacity);
• East-West pipeline/Petroline (5.1 Mbpd capacity from Abqaiq to Yanbu port at the Red Sea);
• UAE/Habshan-Fujairah pipe-line (1.5 Mbpd capacity from Abu Dhabi to the Indian Ocean);
• IPSA pipeline (Iraqi pipeline through Saudi Arabia), 1.65 Mbpd capacity. Built in the 1980s, it runs from southern Iraq to Saudi Arabia and then parallel to the East-West pipeline towards the Red Sea. Confiscated by Saudi Arabia in exchange for an Iraqi debt in 2001, IPSA was converted to carry natural gas. So, as far as oil is concerned, it was out of operation until recently, when the Saudi government has reconditioned it to carry crude again and put it on standby, as an emergency option if the Strait of Hormuz is closed down, in light of the escalating tensions with Iran over the past few months.

The era of persistent irregular conflict

The dangers posed to shipping in the Strait of Hormuz cannot be fully grasped without taking into account some new security trends that have matured over the past decade. One of the core lessons, highlighted by experts analyzing the post 9/11 attacks security environment, was that the “era of persistent irregular conflict” is here to stay. The unconventional wars waged by the United States (U.S.) and NATO in Middle East and South Asia vindicated, in part, this line of argument. After all, the entire conventional military superiority of the West has pushed its enemies inevitably toward embracing asymmetric means in order to hurt the U.S. or NATO. Moreover, it seems that in the last 20 years, the enemies of the Western world learned a simple truth:

“When they fight America conventionally, they lose horribly in days or weeks. When they fight unconventionally by employing guerrilla tactics, terrorism, and information operations, they have a better chance of success.” (John Nagl, 2009) And even if the U.S. is trying to rebalance its strategic mindset away from the Middle East and South Asia’s unconventional land wars toward an offshore Pacific posture, the enemy always has a vote in forcing you to fight his way. You cannot just fight the wars you want, but the wars you must.

Sometimes to survive on the market a company must be creative enough to have a sound strategy that involves identifying competitive advantages able “to impose disproportionate costs upon the competition, making it unfeasible for the rivals to compete effectively” (Andrew Krepinevich, 2009). It is in this logic that countries around the globe, like China or Iran, are trying to invest massively in such asymmetric advantages both on land and water in order to have a chance to neutralize the conventional overwhelming superiority of the U.S. military. Over time, their efforts were directed towards creating a flexible, networked system of mine warfare vessels, submarines, ballistic missiles, precision-guided munitions, small attack boats, anti-ship cruise missile designed to be used as area denial/ anti-access bubbles, a sort of keep-out zones against the U.S. power projection capabilities. “The growth of such keep out zones makes it much more difficult for the US to sustain its traditional forms of forward presence (e.g., close-in airbases, aircraft carriers patrolling close offshore, large ground forces within missile range). Familiar forms of demonstrating military power – flexible deterrent options – may become suicidal for the US. The maturation and proliferation of the extended-range, precision-guided strike regime suggests that traditional forms of US regional deterrence postures and forward presence may be devalued,” says Jim Thomas, an expert from the Center for Strategic and Budgetary Assessments (CSBA).

In the event of a conflict generated for example by a preemptive American strike against Iranian nuclear facilities, decision makers in Tehran could decide to leverage their anti-access/area denial (A2/AD) capabilities and partially block or disrupt the oil and LNG commercial traffic in the Strait of Hormuz as a retaliatory measure.

But to what extent does Iran have such a capability? Recent assessments of top U.S. defense officials are worrisome. In January 2012, Chairman of the Joint Chiefs of Staff Martin Dempsey said that “[the Iranians have] invested in capabilities that could, in fact, for a period of time block the Straits of Hormuz. We’ve invested in capabilities to ensure that, if that happens, we can defeat that. And so the simple answer is, yes, they can block it”. Moreover, in a February public hearing, Lieutenant General Ronald Burgess, the Director of the Defense Intelligence Agency stated that “clearly the Iranians have the capability we assess to temporarily close the Straits of Hormuz. The concern becomes to define temporarily and for how long that would go”.

Anti-access/area denial military scenarios in the Persian Gulf

In the likelihood of an armed conflict between the United States and Iran, the shipping lanes of the Persian Gulf and the Strait of Hormuz are going to be threatened. In case of war, the geography of the Persian Gulf largely favors Iran. The waters of the Persian Gulf are not very deep (50-100 m) and the Strait of Hormuz is 39 km (21 nautical miles) wide at its narrowest point, making it difficult for large fleets, organized around aircraft carriers and supported by nuclear submarines, to deploy and maneuver. In addition, the Strait of Hormuz is a busy waterway.

Iran has the capabilities necessary to strike the sea-lanes and shipping routes that cross the Persian Gulf and the Strait of Hormuz. These capabilities are mine warfare assets, anti-ship missiles and irregular warfare. Furthermore Iran may decide to strike at the harbor facilities of key American allies in the Gulf using ballistic missile and/or terrorist attacks by proxy organizations and networks. It is estimated that Iran has stockpiled around 2000 naval mines, the vast majority of Russian and Chinese origin (Caitlin Talmadge, 2008). Although a small stockpile by military standards, the geography of the Persian Gulf allows for their effective employment. Tehran can employ naval as well as civilian vessels to lay mines that will hamper the movements of an enemy fleet as well as of any merchant ships. Helicopters can also be used by Iran to deploy mines off its coast. Most of Iran’s arsenal of naval mines is made up of contact mines that can be easily swept away by mine warfare vessels. Moreover, oil tankers, especially super-tankers are sturdy vessels than can withstand damage. However Iran also possesses ‘influence’ mines (naval mines that do no require contact with the ship’s hull to detonate as they are triggered by the magnetic field of the ship or by the sound of the vessel passing above them) that are harder to detect and dispose of than contact mines. These mines are laid on the seabed and have timers as well as ship counters in order to better control their employment. They also pack a heftier punch than moored contact mines (Talmadge, 2008).

An Iranian effort to mine the Strait of Hormuz as well as the Persian Gulf can be detected at an early stage and the United States can bring to bear a series of vectors that will hinder the mine laying activities of the Iranian Navy and of the Islamic Revolutionary Guards Naval Corps. The United States has recently deployed minesweepers (naval ships used to detect and neutralize naval minefields) and mine hunters (which detect and destroy mines individually) as well as minesweeping helicopters to the Persian Gulf in order to deter the threat of Iranian naval mines. But mine warfare vessels are vulnerable to attack if they are not adequately escorted by more potent and larger surface combatants and if they do not benefit from air cover.

Using mines to hinder navigation through the Strait of Hormuz and the Persian Gulf is not by itself a winning strategy. It may prove useful in certain circumstances, but there are effective ways to counter such an approach. Its psychological impact is another matter. Mine warfare in the Persian Gulf may result in increased costs to ship owners, increased insurance premiums, a slowdown of merchant traffic and an oil price hike. Iran will also be directly affected by its use of mine warfare in the Persian Gulf (Talmadge, 2008).

Instead, Tehran can deploy other means in order to interdict the use and access to the waters of the Persian Gulf. Iran has a rather large arsenal of anti-ship missile that can be launched from land, ships and aircraft (Mark Gunziger and Chris Dougherty, 2011). The Iranian Navy and the Guardians of the Revolution have at their disposal both short range as well as medium range anti-ship missile that can sink both merchant and naval vessels (Gunziger and Dougherty, 2011). Iran may also call on its air-force to launch anti-ship missiles using strike aircraft (Gunziger and Dougherty, 2011). Again geography can work in Iran’s favor – given the narrow waterways, the short distances involved will translate into short reaction times for anti-aircraft and anti-missile systems aboard US and allied naval vessels (Gunziger and Dougherty, 2011). Furthermore, Iran controls a number of strategically placed islands close to the Strait of Hormuz that can be used for land based missile attacks on commercial shipping (Gunziger and Dougherty, 2011). These islands are the Greater Tunb, the Lesser Tunb and Abu Musa.

Anti-ship missile can be dealt with preemptively by the use of air power which will seriously constrain the activities of the Iranian Navy and its largely outdated air force (Talmadge 2008, Gunziger and Dougherty, 2011). Guided missile frigates, destroyers and cruisers of the US Navy and of its allies will also be able to offer protection to civilian shipping by intercepting the Iranian anti-ship missiles and by destroying their launching platforms. Land based mobile launchers may pose a particular challenge to the U.S. and its allies because of their ability to change places after firing and even to be hidden away. These mobile launchers can be nevertheless neutralized with the help of air power, by mounting continuous fighter sweeps over suspected launching and deployment sites (Talmadge, 2008). Iran’s ability to employ mobile launchers will also be hindered by the destruction of land based surveillance radars that feed target data to them.

The ability of Iran to threaten the sea lanes of the Persian Gulf is supplemented by its capability to mount irregular warfare. Heavily armed small fast boats named ‘boghammers’ can harass shipping by mounting swarming tactics – concerted multiple directions attack on a single target (Haghshnass, 2006). These tactics can also be effective against large naval vessels, a challenge already identified by the United States Navy. The Iranian Revolutionary Guards Naval Corps has been known to harass U.S. naval vessels in the Persian Gulf in the past. In 2007 the Iranian Revolutionary Guards captured 15 Royal Navy personnel and Royal Marines in the disputed waters off the Iraqi coast. Iran may also employ special forces against naval installations to perform acts of sabotage (Gunziger and Dougherty, 2011). Currently Tehran has the ability to infiltrate special forces teams by fast inflatable boats and even small submarines. Midget submarines, a capability that Tehran has been keen to show off, may pose a serious danger to naval vessels in the waters off Iran’s coast (Gunziger and Dougherty, 2011).

Iran’s capability to mount irregular warfare in the waters of the Persian Gulf and the Strait of Hormuz can be reduced considerably by using escort groups and convoys. The likely bases from which such attacks may be launched should be targeted in case of conflict by employing air and naval power. Skillful naval tactics and joint operations are also potent weapons against this particular challenge posed by Iran. Improved security measures on American and allied bases in the region will deter potential raids and sabotage by Iranian special forces. Intelligence cooperation will map out Iranian proxy organizations and networks likely to attack or sabotage military installations and oil facilities in the Gulf. Last but not least, in the near future the U.S. Navy will deploy a class of naval vessel, the Littoral Combat Ship, specifically designed to deal with swarming tactics and irregular naval warfare.

Perhaps the most dangerous capability that Iran can deploy against U.S. interests in the Persian Gulf and the Strait of Hormuz are its ballistic missiles (Anthony Cordesman and Alexander Wilner, 2012). By threatening American allies with retaliation it may deny to the United States the use of naval bases and harbors in the Persian Gulf, which is why the U.S. reassurance to its regional allies of its commitment to the Middle Eastern security is paramount. In military terms the U.S. can deal with the Iranian threat by combining sophisticated surface defenses and offensive air power (Talmadge, 2008).

Are the costs of closing Hormuz manageable?

Closing down the Strait of Hormuz will result without a shred of a doubt in a tightening of the oil market supply and a surge in the energy prices. The consequences of suspending the unhindered commercial traffic through the Strait would be damaging not only for the consumer countries that will immediately reorient themselves to secure other reliable suppliers, but especially for most of Gulf ’s economies which are highly dependent on energy exports. According to a 2011 CSBA report, oil represents 40% of Saudi Arabia’s GDP and is the source for 80 to 90% of its government revenue. So, no Gulf economy will be willing to jeopardize its internal stability at a time when the Arab Spring nurtured huge domestic expectations. In the longer term, we could even witness the development of an alliance between the Western powers (committed through their national strategic doctrines to maintaining the liberty of the global commons), the oil revenues dependent Gulf exporters and key strategic Asian consumers in order to “defend the free passage via the Hormuz Strait with whatever means necessary” (Laura El Katiri and Bassam Fattouh, 2012). Anyway, an Iranian systematic effort to disrupt the transit in the Strait of Hormuz could be seen as an assault not only on the stability of the world economy or on the West, “but also on the East, including China, which gets about one quarter of its oil from the Gulf. Here is one strategic point where U.S. and Chinese interests as consumers coincide” (Daniel Yergin, 2011).

In addition to all this, closing the Strait would be a suicidal movement for the political survival of the Iranian regime. Shutting down the Strait will massively hurt an Iranian economy already weakened by UN sanctions. The oil exported through the Strait (2.2 million barrels per day) generates around 80% of its foreign currency earnings and more than half of its fiscal revenues (Oxford Analytica Daily Brief). Closing the Strait of Hormuz will hurt Tehran as much as it will hurt its opponents – and will represent, according to American intelligence analyst Caitlin Talmadge, the military equivalent of cutting off its nose to spite its face. Given its implications, this will not be a decision taken lightly by the clerical and political elite of Iran.

Is a nuclear-armed Iran a regional game changer?

The moment when Iran will develop its own nuclear device could be a game changer for the entire international peace and security system. Some thinkers such as Kenneth Waltz, the father of structural realism, consider that a nuclear Iran is not really bad news for regional stability because the historical record shows that nuclear armed states tend to restrain their behavior by avoiding at all cost a major war between great powers. At the same time, there is always the possibility that “nuclear-armed states can feel freer to make minor incursions, deploy terrorism, and engage in generally annoying behavior,” stated professor Waltz in July 2012. In his view, the regional stability provided by the nuclear umbrella (that makes a major war less probable) far outweighs the costs of asymmetric disruptive behaviors.

Which regional stakeholder would be comfortable enough to grant Iran the power to become – as Niall Ferguson so eloquently put it – “an empire of extortion that would take full advantage of such a lethal lever”? Having a powerful nuclear deterrent, Iran could be motivated to behave as a regional bully willing to engage in asymmetric adventures and bold movements aimed at disrupting the oil and LNG flows of its rivals in the Strait of Hormuz, providing new offensive capabilities to its proxies (Hezbollah and Hamas) and even willing to engage in brinkmanship operations by leveraging its nuclear covered A2/AD bubble. Shmuel Bar, Director at the Institute for Policy and Strategy, the Interdisciplinary Center in Herzliya, Israel believes that “Iran could send signals that if Israel would attack Hamas and Hezbollah, Iran may take actions. The Iranian regime tends to be risk-prone and with a penchant for brinkmanship. This is something new for the region: a country able to use its nuclear deterrence in order to provide some sort of cover for sub-conventional subversion. At the end of the day, “The Iranian self-confidence could only be bolstered by a nuclear capability. Under the cover of a nuclear umbrella, it is not difficult to imagine scenarios in which Iran brandishes its nuclear weapons in an effort to increase the subversion of Gulf States, or steps up its destabilization of Lebanon,” said Shmuel Bar in an exclusive interview with the authors last year.

When traditional ways of power projection seem to become obsolete, the forces of denial gain a significant competitive advantage (Jim Thomas). Playing an A2/AD poker in the Persian Gulf waters may become a way of life for the Iranian regime, thus turning a regional wild card into a constant degree of unpredictability embedded in the structure of the global energy markets. This risk can be mitigated in several ways. A nuclear shield may very well tame Iran’s regional behavior or, on the contrary, boosts its brinkmanship-prone impulses. The markets have to be prepared for both scenarios.