The U.S.-Israeli war with Iran will have a much greater impact on oil prices than the last time Iran jeopardized global oil trade.
The current war bears many close similarities to the last time the U.S. Navy was sent to the Persian Gulf to combat Iran, during the 1980-1988 Iran-Iraq War.
In 1980, Iraqi dictator Saddam Hussein launched a surprise invasion of the infant Islamic Republic of Iran, both out of fear of the Shia Islamic Revolution spreading to his majority Shia country, and eyeing some of Iran’s oil-rich territories.
Iran occupies a key strategic position on the Strait of Hormuz, the sea lane through which the oil-rich Gulf countries rely on for shipping their oil to the world. Roughly a quarter of the world’s oil supply travels through the strait, and the sensitivity of shipping insurance companies leaves the node particularly vulnerable to disrupting global oil markets.
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The late Iraqi dictator’s invasion didn’t go as planned, and the ground war had stalled by the first year. Looking to break the stalemate, Iraq looked to cripple Iran’s economy by attacking its oil facilities. Iran would soon respond in kind, with the two powers firing on hundreds of oil tankers with dozens of different flags, threatening to skyrocket global oil prices. The harassment of global shipping in the Persian Gulf and Strait of Hormuz came to be known as the Tanker War and triggered the intervention of the U.S. Navy.
Contrary to expectations, the Tanker War and broader Iran-Iraq War didn’t have the devastating impact on global oil prices that might be expected. The biggest impact came during Hussein’s initial invasion of Iran — oil prices rose about 11% in the first six months of the conflict, according to a Congressional report. Oil prices were largely stable after, but decisive action by the U.S. showed that confidence in the freedom of navigation through the Strait of Hormuz still had a major impact on global oil markets.
On April 18, 1988, in response to a U.S. Navy ship hitting an Iranian mine in the Strait of Hormuz, President Ronald Reagan authorized Operation Praying Mantis. In one of the most one-sided engagements in modern naval history, the U.S. wiped out roughly 40% of Iran’s navy, crippling its ability to exert control over the strait. Oil prices fell 5.9% in the aftermath.
The lack of major erraticism in oil prices around the Iran-Iraq War can be credited to multiple factors, including contingency measures formed as a response to the then-fresh 1973 oil embargo, Gulf countries’ development of overland shipping routes, a decline in demand, and a rise in production from other oil-exporting countries.
This contrasts significantly with the explosion of oil prices due to the current war. Just two days after the opening strikes, U.S. benchmark West Texas Intermediate prices rose 7.3% to $71.91 a barrel, while Brent crude, the international benchmark, climbed 8.4% to nearly $78.99.
As the week went on and the U.S. signalled a longer war, WTI shot up 35%, closing the week at around $90. Brent went up to $92. In just a week, global oil markets saw a greater increase in prices than from the entire Iran-Iraq War and Tanker War.
As Center for Strategic and International Studies energy analyst Clayton Seigle explained, the difference is that traffic never stopped through the Strait of Hormuz during the Iran-Iraq War, while it has almost completely stopped due to the current war.
“Because even during the Tanker War, shipping exports from the Gulf remained open and flowing,” he said, while traffic in the Gulf in the current war has almost entirely stopped since Feb. 28. “So we’re now missing 20 million barrels per day, or one-fifth of global supply, and the outlook is growing for a longer disruption.”
Indeed, a 1988 article from the United States Naval Institute estimated that only 1-2% of merchant traffic through the Strait of Hormuz came under attack during the Tanker War. Thousands of vessels traversed the strait unmolested throughout the war.
The primary cause for the complete halt in traffic is the insurance providers for the oil tankers canceling the ships’ insurance once war broke out. President Donald Trump has outlined a plan to provide political risk insurance for ships traveling through the strait, a proposal Lloyd’s of London is in talks with the U.S. International Development Finance Corporation about. Seigle said the proposal was “interesting,” but wouldn’t be a game changer.
“It’s really not a game changer for this crisis that’s brewing, because the problem is not the financing of the insurance. The problem is the decision by the underwriters or the risk managers to do business in a war zone. That’s the problem. Now it’s true that in some cases, the insurance is available, but it’s just too expensive,” he said.
“I’m not sure whether some type of new initiative from DFC can change that math, but the point I’m making is that until the war is curtailed, it’s reasonable to expect that insurers are not going to want to guarantee and to cover against claims that could be encountered because of the war. So there’s no kind of shortcut or way to bypass the need to end the war in order to get those exports to resume,” Seigle added.
Insurers have always been hypersensitive about insuring ships traveling near any area of hostility. Though Tehran has given contradictory messages about the openness of the Strait of Hormuz, messaging from Tehran is largely irrelevant until the war concludes.
One key difference between the Tanker War and today is the increased capabilities of the Iranian military. Iran entered the Iran-Iraq War almost completely isolated internationally, having alienated its potential allies with its revolutionary rhetoric and stunts such as the taking of the American embassy hostage. It had to fight its war against Iraq with leftover weapons from the Shah and whatever it could scrap together. While Iraq had French-supplied anti-ship missiles, Iran didn’t have any anti-ship missiles until the end of the war. For much of the Tanker War, it relied on firing anti-tank missiles at large carrier ships, only able to inflict minimal damage.
Today, Iran possesses a vast arsenal of drones and missiles with the ability to cripple or sink even the largest of oil tankers. Even with much of its navy decimated by Operation Epic Fury, it can fire anti-ship missiles and drones from the shoreline all across the Strait of Hormuz, giving it full control of passage.
The situation also has the possibility of getting much worse. On Feb. 18, CSIS published Seigle’s report showing several hypothetical scenarios for how the global oil trade could be disrupted. One such scenario involved Iran targeting the oil industries of the Gulf countries, including producing fields, gathering and processing nodes, or oil export terminals. Seigle told the Washington Examiner that such a move would amount to “a very severe step.”
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“They’ve done that only in a very minor way so far, with the LNG facility in Qatar and also one of the refineries in Saudi Arabia, but not really the oil export terminals so far. So I would say that the Iranians have not yet played that card. They have been hitting those countries in retaliation for having them host the United States offensive. I think that’s still to come, that the Iranians may choose to play the attack the export facilities card. I would not be at all surprised to see that happen,” he said.
If Iran were to pull that card, if it could even manage with its degraded missile capabilities, Seigle’s report estimated that the price of oil could see a historic spike to well above the $130 per barrel briefly seen after the Russian invasion of Ukraine.
