The next potential oil crisis

| September 29, 2019 | 0 Comments
The aircraft carrier USS Dwight D. Eisenhower patrols the Strait of Hormuz, where Iran seized a British oil tanker earlier this year. As the Iran crisis intensifies, we could see a dramatic spike in oil prices, followed by a recession in late 2020. (Photo: Mass Communication Specialist 3rd Class J. Alexander Delgado)

The aircraft carrier USS Dwight D. Eisenhower patrols the Strait of Hormuz, where Iran seized a British oil tanker earlier this year. As the Iran crisis intensifies, we could see a dramatic spike in oil prices, followed by a recession in late 2020. (Photo: Mass Communication Specialist 3rd Class J. Alexander Delgado)

As the Iran crisis intensifies, we could potentially see a spike in oil prices like the sharp increases we witnessed in 2008 in the lead-up to a major recession. Many observers believe that the next likely recession is in the offing for the later quarter of 2020, following the U.S. presidential election, according to Erik Sherman, writing in Fortune magazine. This could present significant opportunities for Canada’s energy sector over the next year and beyond.
In the period from 2003 to August 2006, crude oil prices rose from $30 a barrel to $60 a barrel and then spiked in July 2008 to $147.30, according to Reuters. A major recession followed, and by December 2008, prices had started a downward trend and stabilized at $32 a barrel. Geopolitical events in North Korea, with missile tests, war between Israel and Lebanon, tensions over Iran’s nuclear program, and Hurricane Katrina — all in 2006 — started the upward push to 2008. China’s increased need for oil and investor speculation furthered the rising prices until they spiked. Sadly, the same political climate and strategic conditions plague us today.
North Korea now has intercontinental ballistic missiles that can reach the entire continental United States, and its edgy relationship with President Donald Trump could turn at any moment. China’s continued push to annex the entirety of the South China Sea has the effect of limiting, or at worst, shutting down any oil or natural gas exploration in the region. The destabilization and pending collapse of Venezuela under its tired, illegitimate socialist regime continue to put pressure on oil prices as OPEC production comes under further pressure.
Israel and Syria, Israel and Lebanon and Saudi Arabia and the Gulf Cooperation Council remain in a state of “daggers drawn” over increased Iranian activities geared to destroy the Jewish State, the Kingdom of Saudi Arabia and the Middle East order, according to The Times of Israel. China and India’s need for oil has only increased, while Japan’s dependency on Gulf oil has not changed and speculators as investors never leave us.
In short, we could well be on the precipice of another oil price spike as the United States and Iran face off in a much more serious manner than they did in 2008. In May 2019, four oil tankers faced attack in the Persian Gulf by Iran and its surrogates, followed by two more tanker attacks in June, resulting in a four-percent increase in crude oil prices. At the same time, Iran likely on its own, and with the assistance of its regional Shiite militia forces, has repeatedly attacked or sabotaged Saudi oil infrastructure putting further pressure on the Middle East supply. It is important to note that 21 per cent of the world’s crude oil supply and 76 per cent of Asia’s runs through the Persian Gulf to market and the strategic naval chokepoint of the Strait of Hormuz. As well, 30 per cent of the world’s liquefied natural gas also transits the strategic strait. In July, in what has become a “tit for tat” approach to seizing oil tankers, a United Arab Emirates-owned, Panamanian-flagged tanker ceased communication and mysteriously found itself in Iranian hands, then in an Iranian port, with the captain and crew silenced.
Iran has seemingly adopted the Russian approach to hybrid warfare in the Persian Gulf, Arabian Sea and Indian Ocean, once known in Cold War (1946-1991) days as “active measures.” To date, after a series of Israeli strikes on Iranian targets in Syria and Lebanon, and their surrogates, Iran has still apparently not retaliated. It has conducted its clear and incremental escalation in the Persian Gulf and its attacks on regional players in the same manner, thus avoiding direct U.S. intervention. Iran, now under increasingly harsh American sanctions since the U.S. withdrawal from the nuclear deal, has no reason to stop until checked. It can continue with pin-prick attacks, warding off U.S. punishment with the threat of a much wider conventional war. It is important to note that the U.S. and its allies have increased readiness in the region and builtup strike forces, but to date have employed them only for deterrence purposes and not attack.
Britain, Japan and India have dispatched — or are in the process of dispatching — ships to the region for what appears to be the start of an armed escort regime as the U.S. did at the height of the Tanker War of 1987-88. It is likely only a matter of time before Chinese warships appear on the horizon, given the People’s Republic’s unquenchable thirst for oil, unless Beijing reaches a deal with Tehran to avoid attack and seizure of its oil shipments. Russia, for its part, will likely continue to give Iran lukewarm support as it has in Syria and Lebanon, as a significant part of Russia’s own economy is powered by oil and natural gas sales abroad. Any increase in crude oil prices helps Russia just as much as it does the Kingdom of Saudi Arabia.
In summary, we can expect to continue to see Iranian hybrid attacks on, and seizures of, oil tankers and other shipping in the Persian Gulf, Arabian Sea and potentially the Indian Ocean while avoiding U.S. military action and retaliation. A likely armed escort regime is in the offing for tankers and other valuable commodities moving through the Gulf region where the Strait of Hormuz provides Iran with the perfect opportunity for a strategic naval chokepoint. At one point, the strait is only 36 kilometres wide, with shipping lanes going either direction. As the U.S. continues to ratchet up economic pressure on Iran, the Islamic Republic is bound to follow suit while continuing to enrich uranium for nuclear weapons.
Given the other global flashpoints in the Pacific — such as the South China Sea and North Korea, as well as in Venezuela, the Middle East, and even Ukraine, Georgia and the Baltic States with Turkey and its faltering NATO membership — further increases in crude oil prices can be expected. That also means spikes as tensions simmer, the thirst for oil in Asia grows and the spectre for strategic military miscalculation becomes the backdrop to the Iran crisis. Canada, with the world’s third-largest reserve of crude oil and its relatively secure geography, bridging West to Asia and East to Europe, could potentially be a happy beneficiary of increased oil prices and market share as Asia, in particular, looks for more secure sources of oil to feed its ever-growing economic engine.

Joe Varner is a consultant on defence diplomacy, strategic intelligence, military operations, counter-terrorism, and emergency disaster management.

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Category: Dispatches

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Joe Landry is a Social Sciences and Humanities Research Council’s Joseph-Armand Bombardier Canada graduate scholar at Carleton University's Norman Paterson School of International Affairs.

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