Hormuz: Getting The Strait Story

What is going to happen to the world's oil supplies if the Strait of Hormuz is closed?

Even by Middle East standards, this scenario has provoked an unusual number of uncertainties and conflicting theories that perplex even the experts.

The first uncertainty is the very premise itself. Can the strait be closed? On this question, the consensus seems to be: well, yes and no.

Iran, the country which has been threatening to close it, if Iraq cripples Iranian oil exports, cannot do this directly. For one thing, it doesn't have the number of mines or the mining techniques required to set up this sort of barrier. Nor can it block the strait by sinking a tanker in it, contrary to popular belief. At its narrowest point, Hormuz is about 25 miles wide the distance that would be covered by 100 of the world's largest supertankers laid end to end.

The Worst Scenario

Indirectly, though, Iran could close down the strait for all practical purposes if it avenged itself for the destruction of its oil facilities by attacking Arab oil exporters in the Gulf, who support Iraq. This is regarded as an improbable, worst case scenario under present circumstances, since Iraq does not appear to have the capability to inflict this degree of damage on Iran's heavily defended main oil export terminal at Kharg Island. The speaker of Iran's parliament has said that Iran would not move to block the Gulf, in any case, unless at least more than half of its oil exports were eliminated. It recognizes that it would also be cutting its own source of income.

What could also effectively close down the strait, however, is any Iraqi success in sinking Iranian oil tankers—something it has threatened to do. This is a more credible Iraqi threat. Sinking of tankers could not only cause tanker insurance rates to soar but would deter tankers from entering Gulf waters at all especially if Iraq mistakenly hit some non-Iranian tankers as well. Destruction of a large number of tankers might even set off the worst case scenario outlined above.

Threats and counter threats by both sides have been so frequent for so many years that the oil industry has been taking it in its stride almost.

Lloyd's of London recently doubled its insurance rate for the Gulf, making it 1.5 percent of the value of ship and cargo. Even the former price is considerably more than the .3 percent of more normal times, but oil sources say it can be lived with. The Iranian government is providing insurance policies at a lower rate, guaranteed by its central bank.

At the present time 8.2 million barrels of oil are going through the straits per day 3.7 million from Saudi Arabia, 1.8 million from Iran, 1.1 million from the United Arab Emirates, 900,000 from Kuwait, 400,000 from Qatar, and 300,000 from Oman.

If all this oil were cut off, a large portion of it could be replaced in various ways. OPEC countries that are not on the Gulf such as Libya, Nigeria and Indonesia have excess capacity which could be used, although it might take a long time to raise production. Saudi Arabia's pipeline to the Red Sea is now carrying only 400,000 barrels, and an additional 1.4 million barrels could be sent through it.

Tankers at Sea

Saudi Arabia has about 50 million barrels on tankers at sea the equivalent of 10 or 12 days normal production. Industrial countries that are members of the OECD virtually all have at least 40 or 50 days of oil reserves on hand and the U.S. and Japan have enough for 90 days. U.S. Secretary of Energy Donald Hodel told Youssef Ibrahim of the Wall Street Journal in early March that the U.S. has decided to move more quickly to use its 400 million barrel Strategic Petroleum Reserve to offset any oil cutoff. This is a break from previous Administration policies, which tended to favor the use of the reserve only as a last resort.

Despite the existence of reserves, there is general agreement that any disruption of supply from the Gulf would cause oil prices to go up if only for psychological reasons. But there are wildly varying guesstimates about the extent of the rise. The International Energy Agency, in a scenario exercise carried out last summer, predicted prices could reach $98 per barrel if all the oil were out off. Other estimates are far lower. One knowledgeable oil analyst told The Washington Report that the key is in the amount of time that it would take the Western powers to find a way of bringing the disruption to an end. "If it didn't happen within the first ten days, panic would set in," he says.