The Importance of Oil Prices in the Persian Gulf Escalation

Following last month’s tanker attacks in the Middle East, two more were attacked on Thursday, pushing U.S. crude prices up 4.5 percent. Over the past several months, global oil prices have been in a stalemate. A report on Wednesday detailed the rising stockpiles of oil, which grew by 2.2 million barrels in the U.S. over the previous week. Analysts had predicted the reverse to happen – a decline of 600,000 barrels.

Many industry pundits have openly discussed what it would take for oil prices to rise again and, as usual, it appears regional conflict will be the answer. This week’s attacks occurred near the Strait of Hormuz, one of the most vital shipping channels in the world. The strait is the only maritime road to the open ocean from the Persian Gulf. In the oil industry alone, 40 percent of global shipments pass through the strait.

The Strait of Hormuz has often come into geopolitical play before, mainly with threats from Iran that it would close the shipping channel, however it never has been provoked to that point, even during the Tanker War of 1984 with Iraq.

U.S. Secretary of State Mike Pompeo and National Security Advisor John Bolton both blamed Tehran for Thursday’s tanker attacks which damaged one Norwegian and one Japanese vessel. Although neither offered any evidence to backup their accusations, Pompeo indicated that U.S. intelligence indicated Iran was behind the attacks.

Iranian Foreign Minister Mohammad Javad Zarif called the attack “suspicious” as it came during the visit of Japanese Prime Minister Shinzo Abe. The leaders of both countries met on Tuesday and Abe was scheduled to meet with Supreme Leader Ayatollah Khahmenei on the day of the attacks. Japan and Iran have historically maintained friendly relations, dating back to the dawn of the Middle Eastern oil era in the late 1920s. Iran was the third-largest oil supplier of the Asian country prior to the U.S. sanctions.

Abe, who visited Iran in the hopes of bridging the diplomatic gap between Washington and Tehran, certainly now finds himself in a tougher predicament. Already, the general Japanese public held a negative opinion on Iran in general. A successful bid to bring the U.S. and Iran back to the negotiating table is the best outcome for Abe’s visit, which would mostly benefit Iran. Japan has plenty of other options for obtaining oil and in light of the recent attack – whether Iran is proven to be the culprit or not – leave Tehran as having the most to lose.

Last month, two Saudi tankers, one Norwegian, and an Emirati were all attacked in a similar manner, likely using limpet mines which attach to themselves to ship hulls via magnets. According to a report from the USS Bainbridge, a missile destroyer patrolling the region, an unexploded limpet mine was sighted next to one of the tankers.

With an investigation into last month’s attack only wrapping up last week, it will be some time before any conclusive evidence, if any, is discovered and analyze. For that incident, representatives from the U.A.E., Saudi Arabia, and Norway presented a report to the U.N. Security Council. The report did not identify a culprit, only that the perpetrator was a state actor acting with coordination.

Tehran officials have accused Western forces or their allies – Saudi Arabia and the U.A.E. – of sabotaging the ships in order to drum up demand for war. Others believe Iran simply wants to raise the price of oil. Indeed, oil has been lower than during the Obama Administration, however crude oil had risen nearly $20 per barrel since the beginning of the year. It’s steady rise only began to retreat in May where it’s currently sitting at just over $50 after Thursday’s tanker attack.

Those who itch for higher oil prices are likely desiring a return to the Obama-era days of $100 per barrel. While neither a reason or a result, those sky-high oil prices amplified the 2008 U.S. recession. Even though the America imports less than 3 percent of its oil from OPEC countries, American petroleum businesses still benefit from coordinating their prices with Middle Eastern producers.

So, while stockpiles are up and prices are down (from a certain standpoint), oil companies are looking for solutions. The best way to raise oil prices, and really any industry, is to create uncertainty in the marketplace. Tanker attacks certainly do provide that element and whether it is Iran, an Iranian proxy, rogue or sanctioned, or a different state actor, it appears to be accomplishing its mission after the second attempt.

One thing that is for certain: with every tanker attack the dogs of war in Washington inch a bit a closer to breaking loose from their leashes.