Why Closing the Strait of Hormuz Would Backfire on Iran

Following scattered attempts at relieving tension between Iran and the U.S., including statements from Iranian officials downplaying the possibility of action in the Persian Gulf, the Iranian navy announced last week that it would again hold military exercises in the Strait of Hormuz, through which 20 percent of the world's oil passes.

That same day, Ali Fadavi, the commander of Iran's Naval Revolutionary Guards, suggested to Iranian state media that the world could not persevere even 24 hours without the Strait of Hormuz. Although Fadavi's statement is a blatant exaggeration--a sudden loss of 20 percent of the global oil supply would be a severe economic shock, but the Earth would keep spinning--it does a raise a key question: Are there viable alternatives to the Strait of Hormuz?

Hormuz, the only exit from the Persian Gulf, lies between Iran on the northern side and Oman on the southern. Almost 17 million barrels of oil pass through it daily, and five of the world's largest oil producers--Saudi Arabia, Iran, Iraq, Kuwait, and the United Arab Emirates--are largely or wholly dependent on it, as is Qatar, the world's leading exporter of liquefied natural gas.

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Only two oil pipelines could be considered ready alternatives. The first is the Fujairah Pipeline. Abu Dhabi, the leading oil producer in the UAE, has spent approximately $3.3 billion building this pipeline, which would bypass the Strait and deliver most of its oil exports to the Indian Ocean. But after years of setbacks, including a six-month delay in 2010 for "design changes," the pipeline has yet to be finished; it is now slated to open in May or June. Although it would make the UAE largely independent of Hormuz, the pipeline can carry only about 10 percent of the total oil transiting the Strait.

The second is the Saudi Pipeline: The Iran rival's pipeline, known as Petroline, was built in 1981 and runs to the Red Sea port of Yanbu. During the infamous tanker wars of the mid-1980s, when fighting between Iran and Iraq threatened to close the Strait, the Saudis increased the capacity to more than 3 million barrels of oil per day, and it can now carry 5 million barrels a day. Many experts, including researchers at Rice University, have long called for a significant upgrade to Petroline to bring its capacity up to 11 million barrels daily, enough to carry all Saudi exports with spare capacity for others. This option could take some 18 months to complete, so this is not an emergency alternative.

Of course other, even permanent solutions exist, such as new or upgraded pipelines leading from Iraq through Syria or Turkey; but again, they would take years to implement. To make matters worse for the West, southern Iraq has close ties with Iran. (Vali Nasr, an Iran expert, notes that southern Iraqi "merchants start businesses with Iranian loans," and a million Iranians visit each year, mostly for pilgrimage.) This further complicates the potential for Iraqi-based alternatives. Iraq's main Gulf export terminal lies close to Iranian territorial waters.

These two pipelines might offer hope that they can one day bypass Hormuz, but in the immediate future, the world is heavily dependent on the Strait for its oil. The depressed global economy makes the threat of rising gas prices, especially in Europe and the United States, even more difficult to stomach. The big Asian importers--China, India, Japan, and South Korea--are also heavily exposed.

And while oil gets all the attention, other key products must travel through the Strait, including 28 percent of the world's liquefied natural gas. It's the only source of gas for Japan, South Korea, and Taiwan, and it's a vital fuel for reducing European dependence on Russia. Iran's Arab neighbors on the Gulf rely heavily on seaborne food and other imports.

There is another possibility: strategic reserves maintained by the International Energy Agency, an organization of 28 major oil-importing states. Reuters reported on Friday that the agency is discussing releasing strategic oil stocks in the event of a Hormuz shutdown. Each member, including the U.S. and its European partners, is required to maintain oil stocks equal to 90 days worth of imports in case of a market emergency. China has about 20 days of stocks but plans to expand this to 100 days' cover, while India is working on a two-week reserve.

These emergency supplies would likely replace Hormuz-based oil for the time it would take the U.S. Navy to defeat an Iranian blockade of the Strait--about two weeks, according to analysts from Societe Generale, a major financial-services firm. But they could not outlast a significantly prolonged closure or disruption. Instead of an outright blockade, Iran might aim instead at disruption or sabotage, creating uncertainty and making military countermeasures more problematic.

Despite Iran's tough talk, it seems unlikely that the country would cut off what amounts to its own lifeline. Iran also relies on an open and fully operational Hormuz. As reported in The New York Times, Iran exports almost 2 million barrels of oil a day through the Strait to countries like China. And the Iranian government, according to researchers at the U.S. Institute of Peace, receives 65 percent of its revenues through its oil industry; would Iran's shaky economy be able to take such a hit? Probably not.

Like its Gulf neighbors, Iran relies on the Strait to move food and other necessary goods. The regime would only hurt an already struggling economy by shutting down the Strait: Unemployment is officially at 12.5 percent (Iran observers believe the figure is much higher), and Iranian officials admit that inflation could rise more than 20 percent later this year. Economics aside, a battle with the U.S. in the Gulf would not be an even matchup for Iran. That's why Fadavi, the Revolutionary Guard's naval commander, and other blustering Iranian officials are, for now, talking and not acting.