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    Trouble in the Straits of Hormuz

    Published in Business Day, 13 February 2007.

    http://www.businessday.co.za/articles/topstories.aspx?ID=BD4A384023

    by Jeremy Wakeford

    A slew of articles have recently appeared in certain international media warning that the United States – or more accurately the Bush Administration – is preparing for an imminent and catastrophic military attack on Iran.

    The evidence of military preparations in the Middle East region is mounting.  In January President Bush announced the deployment of a second aircraft carrier group to the Persian Gulf, along with a surge of 21,500 extra troops for Iraq. He also replaced the head of the Pentagon’s Central Command (which oversees military operations in the Middle East and Central Europe, especially the ground forces in Afghanistan and Iraq), previously an army general known to be against conflict with Iran, with a more hawkish Admiral skilled in tactical sea-based warfare. Furthermore, patriot anti-missile systems have reportedly been deployed around the Middle East, presumably to counter retaliatory missile strikes by Iran on US-friendly neighbours or US military bases. And there has been a massive naval build-up in the eastern Mediterranean.

    According to the Kuwait-based Arab Times, an attack on Iran is likely to occur any time between late February and the end of April. The US Congress is seemingly unwilling or powerless to do anything.

    Why would the US want to attack Iran? The ostensible reason, which has been given plenty of press coverage, is Iran’s nuclear programme, which Washington argues is aimed at the production of weapons of mass destruction. Possibly they are correct; perhaps Iran’s leaders desire nuclear weapons to counterbalance those possessed by Israel. But it is worth asking why the US is determined to prevent Iran from pursuing a nuclear programme when it has not taken any military action against North Korea, which already has atomic weapons capability.

    Arguably, the main underlying motive for US aggression is the geostrategic significance of Iran and its energy resources. Iran has the world’s second biggest natural gas reserves after Russia, and still has significant oil reserves, although they are depleting. Moreover, Iran also recently forged close ties with Russia and China, both of which have invested heavily in Iran and supplied it with conventional weaponry.

    These issues need to be viewed within a broader energy and geopolitical context. The inevitable peak in world oil production is either imminent (set to occur within the next few years) or possibly even occurring at present (as suggested recently by Matthew Simmons, chairman of the world’s largest energy investment banking consultancy). Given the world economy’s overwhelming dependence on oil – for over 35 per cent of primary energy, 90 per cent of transport fuels, and as a crucial input into the agriculture, petrochemicals and pharmaceuticals industries – there is much at stake to gain access to diminishing supplies of crude. In its race to catch up with the industrialised countries, China’s rapidly growing thirst for oil imports sets it on a collision course with the US, which currently consumes a quarter of the world’s oil output. Crucially, the Middle East contains over 50 per cent of the world’s remaining regular oil reserves, and a substantial fraction of remaining natural gas.

    Whatever the possible reasons for US military action against Iran, what would be the likely economic impact? History can supply some clues.

    In 1979 Islamists overthrew the US-backed regime of the Shah of Iran. This Iranian Revolution (and the subsequent war with Saddam Hussein’s Iraq, which was backed by the US) caused the loss of Iran’s approximately five per cent contribution to the world’s daily production of oil. This supply shortfall – and the resultant panic and hoarding behaviour in the oil market – led to a tripling in the price of crude oil. Many of the industrialised countries’ central banks – notably the US Federal Reserve – reacted by sharply raising interest rates in a bid to quash inflationary expectations. In the process they induced a severe economic recession in the US and most of the world, not to mention triggering the Third World Debt Crisis.

    Today, a US attack on Iran could cause a much more serious disruption of world oil supplies, nearly 20 per cent of which flow through the narrow Straits of Hormuz in the Persian Gulf, which is bordered on one side by Iran. Last year, following the Israeli/Hezbollah conflict in Lebanon, Iran conducted war game exercises in the Straits. It is likely that they would attempt to disrupt the passage of oil tankers as a way of retaliating against the US.

    What would be the impact on South Africa? For one thing, Iran is one of our leading suppliers of crude oil imports; this source would almost certainly dry up, causing acute petrol and diesel shortages in some areas. More generally, we would suffer the effects of the inevitable world oil price shock. The two oil shocks in the 1970s did not spare this country’s economy; the initial buffer provided by gold was short-lived, and declining world demand for exports, in addition to domestic inflation, ultimately triggered domestic recessions. And presently our exchange rate is particularly vulnerable to a rising oil import bill, given the huge current account balance the country has been already running for the past year.

    With all this in mind, it is ironic that our government decided to sell off South Africa’s strategic petroleum reserves. It also causes one to wonder what plans – if any – the authorities have in place to deal with a disruption to oil imports. Motorists and farmers will not have forgotten the chaos and financial losses caused by the temporary shortage of liquid fuels a year or so ago in the Cape.

    If indeed the US does launch an attack on Iran and thereby spark an oil price shock, perhaps it will serve as a timely wake-up call to our government – and consumers – to make preparations for the looming peak and decline in global oil production, which itself can be expected to trigger recurrent oil shocks as well as further international conflict. Every day not spent preparing for the era of declining oil production is a day lost.

    Wakeford is a Senior Lecturer in UCT’s School of Economics, and a member of the Association for the Study of Peak Oil and Gas – South Africa (ASPO-SA).

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