Attacks in Arabian Gulf threaten global economy

As Iran restarts production of highly enriched uranium, its regional proxies become more audacious in their operations and as Gulf oil shipments come under sabotage, a stuttering global economy could be dragged into deeper troubles.
Sunday 23/06/2019
Shadow of war. Sailors stand on deck above a hole the US Navy said was made by a limpet mine planted on the Japanese-owned oil tanker Kokuka Courageous, anchored off Fujairah, June 19. (AFP)
Shadow of war. Sailors stand on deck above a hole the US Navy said was made by a limpet mine planted on the Japanese-owned oil tanker Kokuka Courageous, anchored off Fujairah, June 19. (AFP)

DUBAI - Saudi Arabia and its regional allies urged world powers to secure shipping lanes across the region following attacks on tankers in the Sea of Oman. Japanese-owned Kokuka Courageous, loaded with highly flammable methanol, and Norwegian-operated Front Altair, loaded with highly flammable naphtha, suffered damage at or below the water line.

The damage, US and Western investigators said, was caused by limpet mines attached to the vessels by Iranian special forces. Iran denied being behind the attacks but the United States released surveillance footage of what it says is an Iranian team removing an unexploded device from one of the vessels.

Iran has often alluded to the possibility of blockading the Strait of Hormuz to disrupt global oil shipments if its own exports were blocked. In recent months, the United States intensified pressure on Iran with unprecedented economic sanctions that forced traditional customers of Iranian oil to turn to other suppliers and greatly decreased Iranian oil exports.

Tehran accused the United States of “economic terrorism” and vowed to respond, increasing the risk of military confrontation between the two.

Approximately one-third of the world’s crude oil and by-products traded by sea along with all of Qatar’s liquefied natural gas exports, accounting for almost one-third of the global market, traverse the Strait of Hormuz daily.

Western economies meet as much as one-third of their oil demand from Gulf producers. Asia, too, is strategically reliant on petroleum products from the Gulf.

Considered the world’s most strategic maritime choke point, the Strait of Hormuz rarely experiences disruption but when it does there are immediate ramifications in international markets. The attacks June 13 were the second set of assaults in 32 days after four tankers were attacked in mid-May near Fujairah, off the coast of the United Arab Emirates.

The severity of threats to freedom of navigation at sea in the Gulf has not been seen in decades. They could be at the highest levels possible without an actual armed conflict taking place.

BIMCO, the world’s largest international shipping association, issued security advice to avoid navigating through the areas where attacks took place. However, the latest ones occurred further out of the Gulf, in the Sea of Oman, suggesting the “anti-access, area denial” capabilities of Iran no longer confine their focus to the narrow Strait of Hormuz.

With six tankers hauling a variety of petroleum cargoes having been attacked, some ship owners and charterers suspended bookings as shipping risks are re-evaluated. Oil tanker owners, in particular, are facing surging insurance costs to move cargo out of the world’s most important region for crude oil exports.

Insurers, such as DNK, which covered the Front Altair for the full value of the vessel, are increasing war-risk premiums. A ship of that tanker’s size can be worth $50 million and insurers cover owners against any value of damage or destruction caused by terrorism or war.

Reports stated that supertankers’ owners could be paying close to $200,000 in war-risk premiums each time they visit the Gulf. Cargoes are insured under separate policies, the costs of which have also been rising.

With such rising risks and cost of business, operations are being slowed down as more cargo waits to be lifted. Unsurprisingly, oil prices, which had been sliding amid speculation of slowing global demand, have seen a rise of 5% triggered by the latest attacks.

Saudi, Emirati and to a lesser extent Iraqi oil pipelines that offer alternative routes bypassing the strait can provide some cover against total disruption but, if attacks on tankers and commercial shipping persist, oil prices will continue to rise. An actual US-Iran military confrontation, depending on its size and scale, could triple the price of oil.

US Secretary of State Mike Pompeo vowed that the United States will “make sure that we take all the actions necessary” to guarantee the safety of commercial shipping going forward.

The United States has been reinforcing its military deployments to the region in response to the elevated threat level and is dispatching an additional 1,000 troops to the region. The British Royal Navy is deploying another 100 Royal Marines to the Gulf to protect British ships. Other countries are likely to step up activities to protect sea lanes from attacks and sabotage.

The risk of costly war is one that the region is keen to avert but, as Iran restarts production of highly enriched uranium, its regional proxies become more audacious in their operations and as Gulf oil shipments come under sabotage, a stuttering global economy could be dragged into deeper troubles.

2