Washington — A military conflict between the US and Iran is unlikely to lead to significant, lasting increases in oil prices, but uncertainties over the Trump administration's Strategic Petroleum Reserve policy and the state of US protection of shipping lanes present a major wild card for the market, according to a study.
The report, released Thursday by the Center for a New American Security and Columbia University's Center on Global Energy Policy, looked at three possibilities for a US-Iran conflict.
The first, a major increase in Iranian attacks on tankers in the Persian Gulf and Gulf of Oman, similar to the Tanker War of the 1980s, would have "small, short-term" impacts on supply, and cause immediate, but limited spikes in oil prices.
The second, an increase in Iranian attacks on oil infrastructure in Saudi Arabia and the UAE, building on the September 14 Abqaiq attack, could cause a 5.5 million b/d loss of supply, lasting as long as two years, and an immediate oil price spike to $90/b to $120/b, the study states. That spike would likely also be short-lived as prices would return to a $65/b to $75/b range within a year, according to the study.
The third scenario, a major escalation between the US and Iran that would include major damage to Saudi and UAE energy infrastructure and the closure of the Strait of Hormuz, would cause a loss of 24.8 million b/d of supply, roughly one-quarter of the world's supply, and an immediate price spike to $175/b to $200/b. Within a year, prices would fall back to a range of $80/b to $100/b, the report states.
But the report states that this outcome, or any which would have a significant impact on prices, remains extreme and unlikely.
EXTREME ESCALATION UNLIKELY
"Despite these dire scenarios, a key conclusion from the authors' analysis is that the impacts on oil prices from a US-Iran crisis in the [Persian] Gulf are significant but potentially overestimated by experts and policymakers who view Iran's ability to close the [Strait of Hormuz] as a major source of leverage," the report states. "It is only in more extreme scenarios that a dramatic shift in oil prices is seen, and in those scenarios, significant security concerns and a severe public reaction would also be seen."
The impacts of escalating tensions, the report concludes, will be military costs, not energy costs.
"Even in the less escalatory scenarios, which are much more likely, the United States would be forced into long-term deployments of a large number of air and naval assets that would need to remain in the Middle East for years at a cost of billions of dollars," the report states.
The report notes, however, that its key assumptions on oil prices are dependent on the US both continuing its decades-long commitment to protecting energy flows through the Middle East and meeting its International Energy Agency commitments with emergency releases from the SPR. With President Trump, the report states, both of these assumptions could prove false, a potential US policy change which may ultimately increase the price and supply impact of any conflict with Iran.
"No other country has either the will or military capability to play that role if the United States were to walk away from this traditional role," the report states. "But given isolationist tendencies in the United States and President Trump's attitude that America should stop underwriting the defense of its allies, it is conceivable he may choose not to respond in the types of scenario described ... or he may demand that countries most dependent on oil trade from the Gulf - most notably China - step up instead."
Similarly, with a coordinated international SPR release, Trump "might demand trade concessions from China or ask Japan and South Korea to cover costs associated with the military conflict with Iran before releasing the SPR" stocks, according to the report.
-- Brian Scheid, firstname.lastname@example.org
-- Edited by Keiron Greenhalgh, email@example.com
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