The Fuse

Retaliation Risk Rises Following Iranian Oil Tanker Seizure

by Alex Adams | @alexjhadams | July 12, 2019

Tensions in the Persian Gulf escalated further last week, when an Iranian oil tanker was seized by British forces in Gibraltar. The move was immediately condemned by Iranian Defense Minister Amir Hatami as “maritime robbery,” adding that this action “will not go without a response.” The threat of retaliation highlights the precarious political nature of the oil market—and the immediate fallout shows why this threat must be taken seriously.

British Royal Marines and customs agents stopped and searched the Iranian Grace 1 vessel on suspicion that it was carrying crude to Syria, an action that breaches European Union sanctions on the Bashar al-Assad regime. Iran issued a strong denial, and officials wasted little time threatening a seizure in response. A senior member of an advisory council to Iran’s Supreme Leader tweeted that “if the UK does not release the Iranian tanker, our officials are duty-bound to reciprocate and seize a British oil tanker.” Since then, Britain has raised its Gulf shipping threat assessment to its highest possible level, as Iran seeks to disrupt British shipping.

The reply is consistent with Iranian rhetoric when the country is threatened: leverage its position on the Strait of Hormuz to force countries to alter their behavior. At its narrowest point, the shipping lane through the Strait of Hormuz is just two miles wide. Approximately one-fifth of daily global supply and one-third of the world’s seaborne oil trade passes through this chokepoint every day. Closure threats have historically unsettled oil markets, although U.S. and other intelligence community analysis continues to suggest it remains a low-probability event.

Still, the rhetoric surrounding the seizures appears to be working. An oil tanker operated by BP has remained inside the Persian Gulf, fearing the Iranians would attempt to seize it if it attempted to pass through the Strait of Hormuz. The British Heritage, registered in the Isle of Man and flying under a British flag, was originally scheduled to pick up Iraqi crude oil for transport to Europe. However, to exit the Persian Gulf, it would have to pass close to the Iranian side of the Strait, making it more vulnerable to seizure. The loading has been canceled and the ship is sheltering in the Gulf.

The efficacy of Iran’s threats illustrates why the United States spends at least $81 billion every year on securing the global oil supply. Oil is a fungible and globally-priced commodity, and a disruption anywhere affects prices everywhere. Rising tensions in the Middle East have the capacity to raise gasoline prices for American consumers and businesses, regardless of how much oil the United States produces domestically.

The United States shoulders this burden because it is the world’s largest consumer of oil, accounting for one-fifth of daily global supply. Seventy percent of this is used to power a transportation network that is 92 percent dependent on oil, with no alternatives currently available at scale. For as long as oil holds such a monopoly on fueling the American transportation network, it will remain hostage to the political maneuverings of nations surrounding the Persian Gulf.