By Christopher Helman
In a dawn raid Tuesday, two pump stations on Saudi Arabia’s most strategically important pipeline “were attacked by armed drone,” causing a fire that was soon extinguished. Saudi Arabia’s energy minister, Khalid al-Falih, in a statement, called it “terrorism and sabotage.”
It was the second attack on oil infrastructure in the region in days. Over the weekend four tankers were sabotaged in the port of Fujairah. Oil prices jumped on the news, with Brent crude up 1.8% to $71.50/bbl at midday. But reaction is subdued relative to other commodities like orange juice (up 6.5% Monday). The tanker damage appears relatively minor, with one vessel surrounded by a containment boom to gather up any leaking oil. The pipeline fire was put out with no disruption to Saudi oil production.
The U.S. has blamed Iran, while Iran blamed Israel. A Saudi statement pinned it on the Iran-backed Houthis. Iran proxies are also fingered for the recent barrage of rocket attacks on Israel. National security advisor John Bolton warned a few days ago of “troubling and escalatory indications and warnings” regarding Iran. Trump ordered a Navy battle group there. “It’s going to be a bad problem for Iran if something happens,” said Trump Monday. The New York Times reported on a plan backed by Bolton that called for 120,000 U.S. soldiers to invade Iran. (Time to read up on the history of the Gulf of Tonkin.)
It’s all part of the Trump strategy of “maximum pressure” on Iran. A year ago, when Trump snapped sanctions back in place and scrapped the nuclear deal, Iran was exporting 2.9 million barrels of oil per day. As of May, that number is said to be below 1 million bpd. Trump wants it down to zero. That loss of foreign income has crippled Iran, which is in recession and facing 30% inflation.
Traders have had some time to adjust and find replacements for Iranian oil, but amid pipeline disruptions in Russia, societal collapse in Venezuela and militias on the move in Libya, the market has grown tighter than prompt-month prices would imply, says Amrita Sen, an analyst at Energy Aspects. As a result, even obscure grades of crude from Angola and Nigeria are now trading at a premium to Brent benchmarks.
Would Iran’s ruling mullahs, backed into a corner, really risk the repercussions of blockading Hormuz? Unlikely. It does remain a vital chokepoint, moving some 18 million barrels per day, according to Rystad. Qatar, Kuwait and Bahrain move nearly all their crude oil via Hormuz. Iraq about 75%. Aramco used to be that reliant on the strait as well until it spent billions to build twin pipelines that snake west across the desert and away from Iran, to ports on the Red Sea. Now they are able to move 5 million bpd. It reduces the risk of having oil exports held hostage to a potential blockade of the Strait of Hormuz. The kingdom can get roughly half its exports out to the Red Sea port of Yanbu. After the attacks, Aramco temporarily shut the pipeline for inspections and repairs. The Saudis still use their massive Gulf terminal at Ras Tanura, but their system has grown more robust, resilient.
The rest of the world’s oil delivery system has too. Thanks to the oil fracking revolution, the U.S. is now producing 12 million barrels per day of crude oil, more than double a decade ago, and with years of more growth to come. By 2022 the U.S. could vie with Saudi Arabia as the world’s biggest oil exporter. It matters. America’s oil strength means that Trump can enforce his Iran oil blockade, bankrupt bogeyman Iran and push to renegotiate the “worst deal ever” without fear of roiling oil markets. Hormuz ain’t the chokepoint it used to be.
Still, as Richard Nephew puzzles over at Columbia’s SIPA Center: “The problem appears not to be with the implementation of sanctions but rather with the difficulty of their assigned objective: undermining the Iranian regime’s internal cohesion such that it either (1) makes sweeping policy concessions and/or (2) collapses.” Heading into the 2020 election, Trump has America’s oil frackers to thank for his freedom to conduct a swarthy foreign policy in Iran and Venezuela. If only that were enough.