US–Iran tensions and the oil factor By Mahsa Rouhi

With the US to end its sanctions waivers on Iran’s oil exports on 2 May, Mahsa Rouhi reflects on potential Iranian responses, including the shutting down of the Strait of Hormuz – a critical passageway for the world’s oil exports.
On 22 April, the Trump administration announced that it would end waivers of US sanctions on countries purchasing oil from Iran when the existing waivers expire on 2 May, intending to ‘bring Iran’s oil exports to zero’. Rear Admiral Alireza Tangsiri, commander of the Navy of the Islamic Revolutionary Guard Corps, warned in an interview that if Iran was prevented from using the Strait of Hormuz, it would shut down the strait. Iran has issued such warnings in the past. The cost of shutting down the strait would be prohibitively high for Iran, damaging its partially rehabilitated standing in the international community, hurting relations with other countries that the Joint Comprehensive Plan of Action had resuscitated, and risking a military response from the United States. Iran could once again find itself isolated. But, if the US succeeded in completely closing off Iran’s oil exports and other commerce, Iran might conclude that it had little to lose. Iran could also pursue less confrontational strategies involving proxies and asymmetrical pressure that could nevertheless impose significant costs on other countries and cause a spike in oil prices. These too would run the risk of escalation.
I wrote about these issues in ‘US–Iran Tensions and the Oil Factor’ in the October–November 2018 issue of Survival. The article follows in its entirety.
On 7 August, the Trump administration imposed the first tranche of resumed sanctions following its withdrawal from the Joint Comprehensive Plan of Action (JCPOA). The measures included targeting Iran’s automotive sector and blocking its purchase of US banknotes. Even before that, the threat of new sanctions and the rising possibility of war had helped precipitate a two-thirds drop in the value of the Iranian rial over the course of a year. The second tranche of re-imposed sanctions, due on 4 November, will be aimed at cutting Iranian oil exports to zero, although partial reductions from some importers would be allowed on a case-by-case basis. It is expected that US allies in Europe and northeast Asia will comply with Washington’s demand, but that China, India and Turkey – Iran’s first-, second- and fourth-largest customers – will not. Tehran is looking for ways to respond that would still allow the nuclear deal with the other parties to be preserved.
Iran is also trying to induce Saudi Arabia and other Middle East oil exporters not to increase their own oil sales to offset reduced Iranian oil exports by signalling that such actions would have dire consequences. In early July 2018, Iranian President Hassan Rouhani and subsequently Mohammad Ali Jafari, commander of the Islamic Revolutionary Guard Corps (IRGC), indicated that if Iran were unable to sell its oil, no one in the region could do so. This was widely interpreted as a threat to shut down the Strait of Hormuz.1 Notwithstanding its relatively meagre naval capabilities, Iran has the ability to employ proxies and asymmetrical pressure to accomplish such an objective.
A strategic choke point
On 2 August, the IRGC began naval exercises in the strait earlier than expected. According to US officials, more than 100 vessels, including small boats, were expected to participate. The exercises served the purpose of highlighting Iran’s military capabilities. In response to a journalist’s question on the re-imposition of US sanctions, Rear Admiral Hossein Khanzadi, commander of the Iranian navy, said that ‘the cruel sanctions being imposed on Iran will affect Strait of Hormuz functions’.2 Brigadier General Yadollah Javani, the IRGC deputy commander for political affairs, noted ominously that ‘the establishment of security in the regional waterways is not possible without the Islamic Republic’s presence’.3
The Strait of Hormuz has long been a unique source of geostrategic leverage for Iran. It is a critical passageway for oil exports: about 30% of the world’s seaborne oil passes through the strait daily. At its narrowest point, the strait is a mere 33 kilometres wide, and the shipping lane necks down to a width of only about 3 km and is in close proximity to Iran. Iran has a history of imperilling the Strait of Hormuz – in 2012, before the JCPOA was signed, Tehran threatened to obstruct the waterway by targeting oil shipments, as a retaliatory measure against sanctions. As in recent announcements, Iran coupled that threat with military exercises, though it never actually obstructed the shipments passing through.
Even before the JCPOA was signed, the cost of pursuing such a policy was prohibitively high for Iran. According to Hossein Alaei, a retired IRGC commander, ‘Iran could close the Strait of Hormuz and the US could open it. Thus, we need to evaluate the costs of such action.’4 Shutting down the strait would damage Iran’s partially rehabilitated standing in the international community, hurting relations that the JCPOA had resuscitated with other countries. Iran could once again find itself isolated, and resisting an international coalition. China, for instance, has major trade passing through the strait. If the US succeeded in completely eliminating Iran’s oil exports and impeding most of its incoming seaborne goods via sanctions, Iran might not have much to lose. Otherwise, though, Iran’s closing the strait itself would dry up key sources of Iran’s own revenue, cutting off its nose to spite its face.
Most importantly, Iranian officials understand that such drastic action would likely escalate to direct military conflict with the United States, which Iran has strong incentives to avoid. Iranian action would probably involve the coordinated employment of mines, anti-ship cruise missiles and air defences. In countering these measures, the US Navy would deploy at least a carrier strike group, including minesweepers and surface ships with sophisticated defences and offensive airstrike capabilities with respect to Iranian fire positions ashore, both to conduct maritime-security operations to keep sea lanes open, mine-clearing in particular, and to engage in more kinetic operations if necessary. As a deterrent to Iran’s harassment of shipping as well as major military action, US Navy ships would also be on call to escort merchant ships through the strait. From the United States’ perspective, such measures would work but could be costly.5 The potential for escalation and a protracted military engagement – which Iran would inevitably lose – would be high.6
However, the actual closing of the strait is only the most extreme on a spectrum of military options that could interfere with the security of shipments through the Strait of Hormuz. Iran is more likely to pursue less confrontational means. One option, for instance, is to lay mines at strategic points in the Persian Gulf to impede large oil tankers and thereby cause a spike in the oil market – as well as other inconveniences, such as cutting off food shipments to the United Arab Emirates (UAE) – without compromising Iran’s own access. This mechanism would be relatively cheap and reasonably effective, and could possibly avoid direct confrontation with adversary forces. While certain of Iran’s operations in Syria, Iraq and Yemen resemble this option, its approach during the so-called Tanker War in the late 1980s is the most illuminating for understanding how a future conflict might develop.
In late 1987, as the Iran–Iraq War approached its end, US forces captured an Iranian vessel that was laying mines in the Gulf, and destroyed two Iranian oil platforms in response to an Iranian attack on a US oil tanker. In 1988, escalation occurred again when a US frigate hit an Iranian mine, and US forces retaliated by destroying two more Iranian oil platforms. These exchanges culminated in a devastating incident in July 1988 when the USS Vincennes, a guided-missile cruiser, fired two surface-to-air missiles towards a plane the crew believed to be an Iranian fighter but that was in fact a civilian airliner, Iran Air flight 655. All 290 passengers and crew members on board were killed. The US ship’s targeting of civilians was unintentional, but a tragic and massive provocation nonetheless. To its credit, Iran – which may have construed the shoot-down as a deliberate signal that the United States was contemplating direct intervention – refrained from further escalation. While Iran still seeks to avoid direct conflict with the United States – Iranian Supreme Leader Ayatollah Khamenei tweeted in August that there would be no war with America7 – Iran remains aggrieved over the Vincennes incident among many other aspects of US–Iran relations that both preceded and followed it.
Iran today is also in a very different and arguably more advantageous regional position than it was in the late 1980s. Iranian forces and proxies, for instance, are deployed in Iraq and Syria, in close proximity to US and allied forces which they could conceivably attack. Hizbullah, Iran’s most potent proxy, is far better armed than it was 30 years ago. Iran could encourage the Houthi rebels it supports in Yemen to launch missile attacks on Saudi Arabia more lethal and provocative than the ones it has already executed. Any of these scenarios could spiral into wider conflict.
The other strait
While most attention is focused on the Strait of Hormuz, there is another choke point – the Bab al-Mandab Strait on the other side of Saudi Arabia at the entrance to the Red Sea – that is of growing strategic importance in the present situation. Bab al-Mandab is also critical to the movement of oil shipments; approximately 4.8 million barrels of oil per day passed through the strait in 2016. In addition, it is only 29 km wide at its narrowest point, making it even more vulnerable. On 25 July the Yemen-based Houthi rebels – whom Iran supports – attacked two Saudi oil tankers in the Red Sea. In response, Saudi Arabia announced that it planned to temporarily halt oil shipments in the Bab Al-Mandab Strait.
Threatening the security of the Bab al-Mandab Strait by enlisting Houthi proxies is less risky for Iran than interfering with shipments in the Strait of Hormuz. In fact, some US-based analysts believe that Iran may have provided the Houthis with targeting data for the 25 July attack.8 Although Iran has denied any involvement, on 26 July, the day after the attacks, IRGC Quds Force Commander Qassem Soleimani noted: ‘The Red Sea which was secure is no longer secure for the presence of American [military].’9 Israeli Prime Minister Benjamin Netanyahu reacted strongly to the Houthi attacks, indicating on 1 August that Israel, which has $15 billion in trade passing through the Bab al-Mandab Strait annually, would be part of an international coalition confronting Iran if it seeks to close the strait. Even if it is not closed, increased risk will raise shipping and insurance costs for Red Sea trade.
Although Iran considers military provocations in the Strait of Hormuz a last resort, it has been taking measures to lend some credibility to its threats by preparing to engage in conflict in situations in which it is cornered. It is not clear under what circumstances Iran’s cost–benefit calculation would tilt towards such extreme measures; to an appreciable extent, it depends on whether other signatories besides the United States abandon the JCPOA. By expressly holding at risk oil shipments from either or both straits, however, Iran can more plausibly threaten significant economic discomfort to the US and other adversaries. Oil experts already anticipate oil prices to rise above $90 a barrel due to sanctions against Iran alone.10 Shortly after the attack on the Saudi ships, Brent futures rose 19 cents a barrel.11 The latter threat, then, has afforded Iran a more flexible and credible deterrent against US attempts to block oil exports, despite asymmetries in military capabilities. But there remains no guarantee that escalation leading to war would not occur.
A way out?
Given the high stakes and the possibility of uncontrollable and unmanageable conflict, it is worth searching for opportunities amid rising tensions in hopes of setting a de-escalatory tone. The war in Yemen – now the most urgent issue in the Gulf – could be the one to seize upon. Now that the military conflict between the Gulf Arab states and the Houthi rebels in Yemen appears to be at a stalemate, that conflict may be ripe for revived political and security dialogue. Peace plans previously proposed by the UN have called for a ceasefire between the Houthis and the Saudi-led coalition, and for negotiations on a transitional government. The Houthis, for their part, have proven surprisingly resilient, both politically and on the battlefield. This affords Iran, as their sole outside backer, considerable political leverage. In turn, Iran has expressed a readiness to help take constructive steps toward ending the war in Yemen, having sought with some European capitals to broker a ceasefire during Ramadan. The Saudis, Emiratis and Americans would of course be sceptical about Iran’s genuineness in seeking a political resolution of the conflict.
Though usually cast as a spoiler, and with considerable justification, Iran has helped ameliorate regional challenges before. In 2001, Iran played a pivotal role in forming the post-Taliban government following the US-led invasion of Afghanistan. In addition, Iran and the United States formed an effective tactical partnership in the fight against the Taliban and al-Qaeda, as Iran supplied the US with critical information on Taliban locations in Afghanistan. In 2003, building on this diplomatic momentum, Iran offered to explore with the US the resolution of a wide range of contentious issues, including support for Hizbullah and the nuclear issue. The Bush administration ignored the offer, and the bilateral relationship deteriorated further.12
This last precedent, and the singular hostility of the Trump administration to the Iran nuclear deal as well as Iran’s regional activities, are admittedly daunting. But Tehran may be motivated to make a serious effort in order to burnish its credentials as a solid international citizen among non-US signatories of the JCPOA and other supporters of the deal in order to keep them on board. More broadly, Iran has long sought to improve its relations with Arab states, particularly Saudi Arabia and the UAE. Rouhani and Iranian Minister of Foreign Affairs Mohammad Javad Zarif have stated repeatedly that they want to start negotiating on regional security matters. On the American side, the United States’ operational support for Saudi Arabia and the UAE in Yemen has been grudging from the start and, in the event, a political disaster. Accordingly, Washington too may be inclined to give negotiations a shot, and would probably have enough clout to drag Riyadh and Abu Dhabi along. But any such venture on Washington’s part would require sufficient political cover.
When US Secretary of State Mike Pompeo met with Omani Foreign Minister Yusuf bin Alawi on 30 July, they discussed the ways in which ‘US and Gulf interests coincide’ and affirmed that regional stability was key to those interests.13 Following the meeting, the Omani foreign minister expressed a willingness to facilitate talks on Yemen between the US, the Gulf Arab players and Iran.14 De-escalatory mechanisms are becoming more urgent, as international tensions over sanctions are liable to increase as the 4 November start date for the second tranche draws near. A new diplomatic process on Yemen, brokered by Oman, might help defuse them. Such a process might also at least reduce the risk of a wider war starting in the straits around the Arabian Peninsula.
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