Attacking Oil Tankers Is a Bad Idea for Everyone: Oil Strategy

(Bloomberg) -- Six oil tankers attacked just outside the Strait of Hormuz between mid-May and mid-June. British Royal Marines helping to seize a ship near Gibraltar last week moving 2 million barrels of Iranian crude to Syria. Iran’s military pledging to “reciprocate.” BP Plc sheltering a crude carrier inside the Persian Gulf in fear of that retaliation. Insurance costs sky rocketing. Vessel owners avoiding refueling at a regional hub.

Whoever’s to blame, and whatever their motives, one thing is clear: targeting the movement of oil on tankers is becoming a central part of increasing Middle East tensions. It’s something that world powers -- and Iran -- should think about carefully before they unwittingly allow an escalation.

Let’s be clear: we are nowhere near the dark ages of the 1980s, when Iran and Iraq’s "tanker war" saw 451 ships attacked by the two nations, according to data compiled by the U.S. Naval Institute. But there’s clearly a risk of a sharp escalation from here. Oil majors rarely avoid loading crude in fear of their ships being targeted, Iran doesn’t generally vow to retaliate against individual countries’ interests.

But such an escalation will help nobody, least of all the innocent seafarers whose lives are put at risk.

Oil costs could rise sharply in the event that flows through Hormuz, an export corridor for a third of the world’s seaborne petroleum, became materially disrupted. With the U.S. and China embroiled in a trade war that’s already sapping demand and economic growth, any hike in crude costs could sharply add to the recessionary risks. Fears of prolonged disruptions to oil flows through Hormuz could provide the impetus for just such a spike.

Iran wouldn’t necessarily emerge as a winner, either. Although there is little of the country’s economy that isn’t already under sanctions, President Donald Trump would seek to hit it even harder if he deems Tehran to be hurting the global economy.

And then there’s the more direct response. While President Trump shied away from a military response to the downing of an American drone by Iran, the U.S. and its allies would have to respond if traffic through Hormuz were disrupted. That might initially take the form of naval escorts for convoys of merchant vessels to deter any interference by Iran, but could quickly escalate in the event of any attempts to disrupt the passage of ships. It is all too easy to imagine the sinking of a fast patrol boat of Iran’s Republican Guard by a U.S. warship triggering a much more serious conflict that even Trump cannot step back from.

Merchant ships, almost always incapable of protecting themselves, may seem like the easiest targets in the world.

Militarily, yes. Economically, no.

*NOTE: Julian Lee is an oil strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice

To contact the reporter on this story: Julian Lee in London at jlee1627@bloomberg.net

To contact the editors responsible for this story: Alaric Nightingale at anightingal1@bloomberg.net, Rachel Graham

©2019 Bloomberg L.P.