Energy security and waterways in light of new tensions in the MENA region by Syed Shahnawaz (Simon) Mohsin

 

Source: Financialtribune

Syed Shahnawaz (Simon) Mohsin

Independent Political and International Affairs Analyst

Concerns of regional conflict in MENA threaten world energy security as the possibility of attacks on regional energy infrastructure rises. The region produces about 30% of global crude oil, the vast majority produced by Saudi Arabia, Iran, Iraq, Kuwait, and UAE. Three major oil transits or chokepoints—the Strait of Hormuz, Bab-el Mandeb Strait, and the Suez Canal—are in this region. About 40 million barrels of fuel pass through these waterways. Some argue that markets may underestimate the geopolitical and potential energy supply disruption risks. However, nuances must be considered. Palestine and Lebanon are not major oil producers. Thus, conflicts there do not directly threaten oil supplies. Nonetheless, a prolonged conflict involving Iran could lead to a significant increase in oil prices.

In early October, oil prices increased to a two-year high after the US President mentioned possible attacks on Iran's oil infrastructure. Iran produces around 3.2 million barrels and exports about 1.4 million daily, and it is particularly vulnerable to such disruptions. Iraq could also be at risk.  OPEC+ made several voluntary production cuts in the past two years and is struggling to increase supply now because of weaker oil demand, especially in China, and robust non-OPEC+ supply. So, OPEC+ has approximately 6 million barrels per day of spare productive capacity that is readily available to come to market should it be required. However, a further risk for the oil market would be if the Strait of Hormuz became inaccessible. Oil and LNG shipping operations disruptions could increase prices to $150 or more. 

Roughly a fifth of the world's oil is shipped through the waterways mentioned above from the world's largest producers, i.e., Saudi Arabia, the United Arab Emirates, Kuwait, and Iraq. Qatar exports roughly 20 percent of global LNG through the Hormuz Strait to Asia and Europe. The LNG market's vulnerability is high, as there is little or no spare capacity should there be a disruption. Unlike Iraq, Iran exports some gas via pipeline to Turkey. However, intentional disruptions to the pipeline carry political risks, with sufficient capacity available to import more Russian gas. Stricter security measures for ships could cause delays in the supply chain.

Technologies like tanker trackers and satellite surveillance allow the market to react less to potential supply risks. For instance, after the September 2019 attack on an oil-processing facility in Saudi Arabia, satellite surveillance showed that Saudi Aramco repaired the damage and used inventories to sustain export levels, causing prices to return to pre-attack levels within two weeks.

The Houthis have attacked about 80 vessels in the Red Sea this year, resulting in no LNG tankers faring the route since earlier this year. The longer the Bab el-Mandeb Strait remains off-limits for Western LNG trade, the greater the disadvantage for U.S.-Asia commodity routes. The largest Asian LNG importers are China, Japan, South Korea, India and Taiwan. The biggest concern for energy security is for countries like India, which largely procure their energy from the Middle East. There is another subsequent effect on countries like Bangladesh, which depend less on fuel from the ME but more on the forex as remittance from the ME. While conflict could hamper remittance inflow, hiked oil and LNG prices will cause inflation and create a financial burden for countries like Bangladesh.

In the short term, these conditions will add to market volatility. In the worst case, they risk an escalation that could eventually disrupt oil flows directly and drive historic price increases. The actual risk of a blockade appears low. Specific ships or cargo could continue to be affected, but a complete blockade will significantly impact prices.