An attack on Iran that blocks the Strait of Hormuz would clearly have an impact on the Gulf economies. But when it comes to the possibility of a Gulf conflict, companies are extremely reluctant to talk about whether they have contingencies in place. 

American technology firm Emerson, which works with the energy industry, replied to interview requests with the following: “Unfortunately since there’s insinuation about Iran in the feature we will not be able to take part whatsoever in this. We have very strict laws regarding this topic.” Royal Dutch Shell gave the incredulous reply: “We are not involved in politics so will not comment.” 

Even without comment from companies, it is hard to imagine that they or governments in the Gulf Cooperation Council have not given some thought to contingencies if conflict does erupt. “GCC governments have been thinking about this for quite some time; it is not as if a conflict occurring would come as a surprise,” said a high-ranking economist at a leading Gulf bank, who wanted to remain anonymous. “That said, GCC governments are not known for advance forward planning.” 

While the temporary loss of oil revenues would be a major blow to GCC states (see story page 42), certainly in the immediate term, non-oil sectors would also be negatively affected, such as the service sectors, aviation and tourism, all of which have grown over the past years.  

“The Gulf economies are dependent on stability… so an attack on Iran would be a disaster, not just in terms of all the oil that would be locked in,” said the head of a European oil company off-the-record due to company policy. If a conflict happens, Gulf countries would be within missile range of Iran, and a possible target, particularly countries hosting United States forces: Qatar, Kuwait, Bahrain, the UAE and Oman. 

Soft spots

The ports are a clear weakness given the region’s import dependence, while desalinization plants are a further weak point. According to Shahin Shamsabadi, a senior associate at consultants The Risk Advisory Group in Dubai, if the Fujairah desalinization plant was targeted, the UAE would only have enough water to last out the week.

Indeed, the Gulf’s 30 ports handle 30 million TEU (20 foot equivalent units) containers per year, and just under 250 million tons of general and bulk cargo. The shutting in of the UAE’s ports would be particularly damaging, accounting for 61 percent of the Gulf’s trade volumes, and Dubai Port with 13 million TEU per year a major re-export hub for the region as well as the wider Middle East and Africa, according to DP World. The UAE’s re-export trade was worth $205 billion in 2010-2011 fiscal year ending in April, according to the Abu Dhabi-based Arab Monetary Fund (AMF).

“It is a doomsday scenario for the Gulf,” said Shamsabadi. “A war right now… would prompt new discussions about [Qatar hosting] the World Cup [in 2022], and affect expansion plans of foreign companies and international oil companies. Only Saudi Arabia would be all right because it is so big.”

A massive personnel outflow from the Gulf may ensue, although it is likely that not all nationalities would react in the same way. “If you take the example of the Gulf War (in 1990), a lot of expatriate Arabs and expats from the Indian sub-continent are more likely to stay and Western expats to leave,” said Shamsabadi. There are an estimated 10 million expatriates in the GCC; from the West, British citizens are the dominant group, estimated at 100,000 in the Emirates alone. 

The Gulf bank economist disagreed, at least in the short-term. “I think people would stick around initially. If the conflict lasted more than two or three weeks, and was looking like a long running affair, people could start to re-assess their options. But for a lot of expats it is not easy to leave as most are here for economic reasons. As long as economies remain strong, I don’t think the impulse to leave would be there,” he said.

Furthermore, a conflict now would likely not economically hurt the Gulf to the same degree as if a war had occurred prior to the financial crisis. 

“Certainly the stock markets would take a hit, but the markets have been going nowhere for the last few years. There is not a lot of trading go on and not a lot of liquidity,” said the economist. “It is not like 2008. If a conflict happened then, it would have hit the region like a steam train as everyone was very bullish. Now the situation is not the same, the private sector has been weak since the financial crisis and confidence is fairly weak, so the scope for a sharp response in reaction to some geopolitical event like this is limited. Most growth is (currently) due to government spending, and following a conflict, they would increase or maintain spending.”

The oil crisis in 1973 saw oil prices quadruple, equivalent today to a jump from $125 to $500 per barrel at late February prices. If Iran is attacked and oil tanker traffic is disrupted through the Strait of Hormuz, some 17 million barrels per day (bpd) would be taken off line and the markets would immediately react. Analysts forecast a price spike anywhere from a third (to more than $166 per barrel) to a 100 percent surge (to $250) depending on the scale and length of the conflict. 

But what needs to be taken into consideration is current global production, as the markets have been skittish of late. The extent of the markets’ jitters was reflected when the European Union announced oil sanctions on Iran — not implementing them — causing oil prices to rise, to $110 a barrel in January and gained some 15 percent throughout last month on the back of rising tensions. And with the EU having to re-source 600,000 bpd, this has had an effect on the markets. As the United States’ Energy Information Administration (EIA) noted in its monthly Oil Market Report in February, “International sanctions targeting Iran’s existing oil exports do not come into effect until July 1, but they are already having an impact on crude trade flows in Europe, Asia and the Middle East.” 

Add to this that Europe no longer has access to around 145,000 bpd it imported from Syria due to last year’s sanctions, and post-Gaddafi Libya is still not at full operating capacity, pumping some 300,000 bpd less than the 1.6 million bpd pumped before the civil war. Equally, instability and attacks on pipelines in Yemen has seen oil production drop by 40 percent over the past few years, from 286,000 bpd in 2009 to an average of 170,000 bpd last year. To boot, the Republic of South Sudan stopped all oil production and exports in late January over a dispute over oil transit fees with its northern neighbor that is not likely to be resolved anytime soon. In total that already amounts to 911,000 bpd off the market.

“I think if the situation in Sudan continues, the more effect this will have internationally,” said Marc Mercer, an East Africa specialist at risk consultancy Eurasia Group in London. “350,000 barrels off the market is not big enough to have a huge shock on the market at the moment; having said that, from the Chinese perspective, 5 percent of their oil comes from Sudan.” 

Indeed, if Iranian and Gulf oil also went offline, China would be in a serious quandary, with the Gulf providing just under half of its crude oil imports, as would Japan, South Korea and India, with the Asian markets accounting for roughly three-quarters of the Gulf’s crude exports. 

The big picture issue in the advent of a war with Iran is how will 20 percent of the world’s oil production, as well as natural gas, be distributed? Of the 21.45 million bpd produced in the Gulf, 4.45 million bpd is consumed domestically and 17 million bpd is exported. An estimated 5 million bpd could be exported via Saudi Arabia’s Petroline pipeline from the east to Yanbu on the Red Sea, leaving some 12 million bpd under threat. The Trans-Arabian Pipeline, which ran to Lebanon, has not been operational for decades.

One option is the 1.5 million bpd, 370-kilometer-long Abu Dhabi Crude Oil Pipeline that runs from the Habshan oilfields in the west of the UAE to Fujairah outside the Strait of Hormuz, but the pipeline is not yet operational due to delays and is not expected to be functional until the summer. This leaves few options for the remaining oil other than to linger in storage. 

The Saudi save?

The world’s swing producer, Saudi Arabia, has promised to boost capacity to help offset demand, although it remains to be seen how the Saudis could export such increased output in the advent of a Gulf conflict, given the kingdom’s lack of transparency when it comes to actual production output. An added complication is that the bulk of Saudi exports go to Asia, meaning oil transported to the Red Sea would then have to head east again, adding on 1,200 nautical miles and five days to shipping times.

What would close the supply gap would be the stock piles amassed by Organization for Economic Cooperation and Development (OECD) governments, equivalent to 1.6 billion barrels, enough to cover the loss of 11.5 million bpd for four and a half months, according to the Center for Global Energy Studies’ publication Global Oil Insight. 

According to research carried out by a major Gulf bank, which asked for anonymity, a two-week shut down of the Strait would result in a 25 percent loss in oil trade, causing revenue losses to GCC countries of some $5 billion. After a month, it would lead to a 50 percent loss in oil trade, equivalent to $10 billion. “Based on our assumptions, the impacts wouldn’t be very dramatic as it is not realistic for Iran to block the Strait even if they mined it, so two weeks seems to be a reasonable estimate,” said an high-ranking economic analyst at the bank.

But this is perhaps rather a conservative estimate, or “best case scenario.” With an average of 14 tankers a day passing through the Strait, each carrying an estimated $200 million worth of fuel on board, that would be around $2.8 billion worth of oil (at market prices) off the market. Another reading is that the GCC countries earned $465 billion in oil revenues in 2011, equivalent to $1.27 billion a day, although that includes non-sea exports and domestic sales. Therefore, in a worse case scenario, GCC countries could lose more than a $1 billion a day in oil revenues. 

Liquefied natural gas (LNG) is another story. Qatar is now the global hub of LNG, accounting for roughly a third of production at 77 million tons per annum, while Abu Dhabi produces 6 million. With the Strait blocked, LNG would be locked in as the primary export route is by sea. Indeed, Qatar’s Ras Laffan Port loaded 1,000 LNG tankers last year, equivalent to 2.7 tankers per day. If LNG exports were blocked, it would be a devastating blow for India, which receives nearly 90 percent of its LNG from Qatar, as well as for other Asian countries, while Italy receives 10 percent of its annual gas needs from Qatar, and Britain 15 percent. Needless to say, a temporary shut down of LNG would be a serious hit to Qatar, which earned $30 billion last year from gas exports. “Of all the Gulf countries I think Qatar is the most worried about a conflict as, theoretically, they would face the chilling prospect of all LNG being undeliverable unless it could be transported to Oman or the UAE, where it could be re-shipped, but I don’t think these countries have the re-liquefaction capabilities,” said the analyst. 

The good side of bad

But not everyone holds that a war with Iran would be bad. “It wouldn’t affect us at all, as we will be getting $200 a barrel. The Fujairah pipeline could be opened faster and the UAE is always lucky when we face problems,” said a spokesperson for the Abu Dhabi National Oil Company. This would hold true after the crisis ends. According to research by the International Bank of Qatar (IBQ), for every $1 increase in oil prices, the GCC earns an extra $4.5 billion. 

“If oil prices shift upwards due to the conflict, the loss of volume (incurred) could be offset (afterwards) by the sale of oil at high prices,” said the economic analyst.   Oil producing countries outside of the Gulf would also stand to gain significantly from the price spike. “If oil prices go up, the Russians for instance would benefit hugely as their cost of extraction is much higher than in the Middle East, so would end up making higher margins,” said Michael Elleman, senior fellow for regional security cooperation at the International Institute for Strategic Studies-Middle East in Bahrain.

And while logic would dictate that international oil companies (IOCs) would stand to lose out during a conflict, with operations curtailed and production affected, they would in fact reap profits. “IOCs are happy to have war,” said Anna Abrahamian, an independent energy lawyer. “Certainly insurance fees would go up, but the profits they would make would exceed the risk. That is why when the US pushed for sanctions on Iran no IOCs objected, and there are some companies that have scenarios for making money during sanctions or if a pipeline is blown up somewhere.” She added: “IOCs are praying to go into Iran.”

Just west of the Strait of Hormuz lies the United States Navy’s Fifth Fleet in Manama which “covers the busiest 60 acres in the world,” according to military.com, the largest US army and veteran online forum. The naval command center in Manama coordinates NSA (Naval Support Activity) of nine US bases in Bahrain, two in the United Arab Emirates, the Kuwait Naval Base, and Masirah Island off Oman. It could become even busier if there is a conflict with Iran to neutralize its alleged nuclear weapons program.

Activity would likely also heat up at the 44 US military bases that effectively surround Iran in the Middle East and Turkey, commanded from the US Central Command (CentCom) at the Al Udeid Air Base in Qatar – and that does not include Afghanistan. The US would equally make use of a 1994 bilateral defense pact, the “status of forces agreement,” with the UAE, which has enabled the Emirates to have the world’s most advanced F-16 E/F Block 60 fighter jets, and for 3,000 US air force personnel to be stationed at Al Dhafra Air Base.

Movement is already increasing, with 15,000 US troops – fresh out of Iraq – stationed in Kuwait. Out at sea, the US sent a third aircraft carrier group this month (March) to the Gulf, the USS Enterprise-led “strike group” that includes six other ships. Britain meanwhile has sent its top of the line, $1.5 billion warship HMS Daring for a seven month deployment to the Gulf to accompany a 25-nation, US-led Combined Maritime Forces flotilla that is, in the words of Britain’s Ministry of Defense, “to bolster maritime security and regional stability across the Middle East.” On top of this, several hundred nautical miles to the West, are four NATO ships patrolling the Gulf of Aden, ostensibly in search of Somali pirates as part of Operation Ocean Shield. 

On the Iranian side, the military has carried out six war games over the past few years, with the latest, last year, dubbed the “Great Prophet 6,” involving the testing of short, medium and long-range missiles. At the beginning of 2012, Iran carried out ground maneuvers inland and near the Afghan border, and has kept its navy on high alert, with Iranian boats tailing US warships as they entered the Gulf. Not willing to be boxed into the Gulf, Iran sent warships through the Suez Canal to the Mediterranean in February to show what Admiral Habibollah Sayari said was the “might” of the Islamic Republic to the region. 

Such a show of force in the Gulf is alarming amid the specter of war with Tehran, yet it is hardly the first time there has been such a multi-flagged armada charting the Gulf’s waters in relation to the “Iran threat”. Back in 2008, there was a similar “unprecedented” build up of naval force, the largest since the 1990 Gulf War, which put Kuwait on its highest war alert since Saddam Hussein’s forces invaded the country.  Nothing happened. But this time the saber rattling by Western powers, Israel and Iran could turn into all-out conflict, whe-ther by design or through some accidental spark as the tensions rise to white hot levels (see scenarios, page 48). 

“This is not a time political analysts or leaders are taking a holiday or going skiing, it is a time to be active,” said Ibrahim Saif, resident scholar at the Carnegie Middle East Center in Beirut who specializes in the political economy of the Middle East. 

A narrow window of opportunity

The crisis revolves around Iran’s alleged nuclear weapons program, and it is more evident than ever before that the balance of power cannot be altered by allowing Tehran to get the bomb, which would rival the Middle East’s only nuclear power, Israel, and could spark a regional nuclear arms race. 

Indeed, Saudi Arabia has recently hinted that it may go nuclear, while Western intelligence agencies indicate that Riyadh funded up to 60 percent of Pakistan’s nuclear program with the tacit understanding that the kingdom could put up to six Pakistani warheads on its turf if Iran acquires nukes, according to a report in The Guardian newspaper. Saudi Arabia has never publicly called for a war on Iran, but as a prime opponent of an ascendant Islamic Republic, its stance was made clear in a leaked US diplomatic cable from 2008, with King Abdullah calling on the US to “cut off the head of the snake” by launching military strikes to destroy Iran’s nuclear facilities. 

While the Gulf monarchies view Iran as a threat, it is Israel that has been beating the drums of war the loudest against its long-term nemesis. As US Defense Secretary Leon Panetta stated in early February, an Israeli attack could come as early as this spring. The big question is whether Israel would unilaterally launch strikes against Iranian nuclear facilities. 

According to research carried out by Scott Johnson, a defense analyst at IHS Jane’s, it would be exceedingly difficult. “The problem is that the Israelis have a limited number of aircraft that can reach key facilities, and their window of opportunity is in the minutes to hit targets and come right back. The only way to help Israeli aircraft out is via refueling in the air but they have a limited number of air-to-air refueling craft, and they would be in harms way, so would need aircraft to defend them. It would be a massive operation that would necessitate the majority of Israeli strike aircraft operating simultaneously,” he told Executive.

Indeed, reports indicate that Iran’s nuclear facilities are spread around some 20 locations and have been built with US and Israeli strike capabilities in mind, while having modern Russian air defense systems to protect them. Such tactical complexities are arguably a reason for the US to not attack Iran either.

“Nuclear facilities are well dispersed, and it would take a month of constant air attacks as you can’t just drop a bomb on a facility as it is deeply buried; they would have to be pummeled. An attack would also involve a lot of search and destroy missions against Iranian missiles as well as anti-shipping missiles to stop the sinking of ships. That is why the US would be reluctant to take this on,” said Michael Elleman, Senior Fellow for Regional Security Cooperation at the International Institute of Strategic Studies (IISS) Middle East in Bahrain. “If they are really planning surgical strikes, we wouldn’t know about it. An all out war we’d see a build up. We knew a year in advance the US was going into Iraq as it was hard to keep concealed. But I don’t see the US ready to take a major offensive against Iran and I don’t think it is in the US interest or anyone else’s.” 

That said, President Barrack Obama has stated that Washington will work in “lockstep” with Israel to prevent Iran’s nuclear aspirations, and that “all options are on the table.” But if Israel does instigate a war, it is expected that the US will have to get involved, as Iran would not sit back and do nothing, unlike the Iraqis when the Israelis bombed the Osirak nuclear facility in 1981 or the Syrians when Israel targeted the alleged nuclear facility in Al Kibar in 2007. 

The Islamic Republic Strikes Back

“The attack would be so large it couldn’t be ignored. I don’t think the Iranian regime would survive if they did nothing,” said Elleman. Iran would mobilize its 520,000 uniformed service members to respond to air assaults on nuclear facilities, air bases, missile sites and infrastructure. Given the Iranians’ past threats to blockade the Strait of Hormuz, a naval campaign in the Gulf would be a major arena of conflict. “Iran can close the Strait of Hormuz at least temporarily, and may launch missiles against US forces and our allies in the region if it is attacked,” said Defense Intelligence Agency Director Lieutenant-General Ronald Burgess at a Senate Armed Services Committee hearing in December. 

The US Institute for Peace has noted that Iran’s military is configured in a defensive posture, “specifically to counter the perceived US threat.” Lacking the same fire power and conventional military capabilities as the US, Iran would use asymmetric warfare instead. 

Iran has developed “a strong asymmetric capacity that focuses on the use of smart munitions, light attack craft, mines, swarm tactics and missile barrages to counteract U.S. naval power,” stated a report by the Center for Strategic and International Studies. Such tactics could prove highly effective. In a war game conducted by the Pentagon in 2002, a large number of Iranian speedboats swarmed US warships, detonating explosives and attacking with fire arms and rockets. Within five to 10 minutes, the US Navy lost 16 warships, including an aircraft carrier, cruisers and amphibious vessels. While the US has developed its response to such swarm tactics over the past decade, the Iranians have equally improved their asymmetric capabilities. 

Stumbling into war?

What is concerning analysts is that given the current tensions in the region and the build up of military forces, along with the Iranians and the US and its allies having conducted war games in the Gulf, there is the possibility of the world stumbling into a war. “My impression right now is rhetoric has been ramped up in the West to have effective sanctions. We’ve seen the EU agree on an oil export ban, and seeing more and more pressure put on countries in Asia to go along. It is part of human psychology to avoid war, but my worry is that if there is a mistake, a miscommunication or incident in the Persian Gulf, this could lead to a situation that spirals out of control,” said Elleman. “Iran is constantly doing war games and is quite careful when they do it, but what if they fire an anti-ship missile and it gets away from them? A pure accident results in the sinking of a Saudi tanker or casualties on a US or French frigate in the Gulf,” Elleman added. “It is not likely, but I don’t think any of us are smart enough to anticipate it. Frankly, that is what I worry about the most is someone making a poor decision and then it escalates, for do we have mechanisms in place with Iran to control it?”

Gulf War Three

If any of the above plays out, Gulf War Three, if not World War Three, would be underway.

The Gulf Cooperation Council (GCC) countries would be in the immediate line of fire from the Iranians, notably the countries hosting US military facilities, and ports. “If ever there was an inter-Gulf war, the ports would be the prime targets. It is not just cutting off Hormuz that can starve a country, as all countries are import dependent,” said Shahin Shamsabadi, Senior Associate of the Middle East & North Africa (MENA) Practice at The Risk Advisory Group in Dubai. 

If GCC countries were attacked in response to a US led attack on Iran, Elleman said the GCC militaries would coordinate with the US and the response would depend on which country was hit. “If it was Bahrain, what do they have to retaliate with? They have very limited capacity and that is why they asked the Fifth Fleet to be here. The UAE I suspect would take some action with their air force. I’m most impressed with their planners and intelligence people, they have their act together relative to the rest of the GCC,” he said. But the conflict would not solely focus around the Gulf in a US instigated war. The Iranians could use covert attacks against US interests globally as well as enlist proxy forces in neighboring Afghanistan to target US and NATO forces. In such a scenario, the US would get no support from Pakistan, a major player in Afghanistan. Islamabad, which is going through a low-point in relations with Washington, stated in February it will not support an attack on Iran or allow the US to use its local airbases for military operations, although whether it would actually do more for Iran is unclear. 

If Israel carried out the initial strikes, this would add another dimension to the conflict.

“An Israeli element to the attack would unite Iranians and possibly other states against the attackers, although it obviously depends on the scale of the attack,” said Shamsabadi. 

Hezbollah, could retaliate, raining rockets onto the “Zionist entity” from Lebanon, which would prompt a harsh Israeli military response. But this is where it gets complicated. With Syria descending into civil war, the response of Iran’s regional ally to a Gulf war is an unknown, but the West and Israel could capitalize on instability in the region to bolster the rebels in Syria to further destabilize the country. This could also drag the Russians in. It is a strategic ally of Syria, and the port of Tartous is the Russian navy’s only base in the Mediterranean. “For the Russians, it is of utmost importance to protect the Syrian regime as it provides intelligence, access to the Mediterranean and arms deals,” said Saif. 

If the conflict spread from the Gulf to the Levant, two fronts would be open in the Middle East, and with the uprisings that have swept the region over the past year still in various phases, compounded by the economic damage a conflict would entail, major instability throughout the MENA would ensue. As fault tree analysis shows, one event can have a top-down effect that leads to numerous other lower-level events. “All the branches that could be spun off if a war breaks out are incalculable,” concludes Elleman.

Among the fables of the ancient Greek storyteller Aesop is that of a young shepherd who repeatedly raises false alarms about a looming wolf with nearby villagers; the crux comes when a real wolf later appears but nobody believes the boy’s cries before it is too late. Now, replace “young shepherd” with “the media, Middle East experts and informed sources”, then replace “wolf” with “war with Iran”, and this tale from antiquity is suddenly spun into contemporary non-fiction.

In the summer of 2007, I wrote a commentary for these pages describing the then-resounding rumors of an impending war with Iran. I could easily submit the same piece again for publication today, changing just a fact or two and updating the latest political rhetoric. It was actually two years before, in 2005, that the current wave of media reports warning of imminent war with Iran began to deluge my email inbox. Having forwarded a number of these articles to my sister over the years, she acerbically remarked to me in 2009: “You told me a war with Iran would happen last year, and the year before that but nothing happened.” I replied: “Just wait and see.”

But wait she has — in fact all of her life — with the Iranian nuclear weapons crisis playing out for three decades now like a long-running TV soap opera. The public, particularly in the West, has been regularly prepped about the pressing need to tackle Tehran; the Christian Science Monitor outlined a litany of examples in an article last year, among them that West German intelligence reported as early as 1984 that Iranian nuclear arms production “is entering its final stages”, and in 1992 Benjamin Netanyahu, then an Israeli parliamentarian, said Tehran was no more than five years from a nuclear bomb and that this threat needed to be “uprooted by an international front headed by the United States.” George W. Bush kept the fire raging with the inflammatory tones of his infamous 2002 “axis of evil” speech, labeling Iran a “rogue state” and ratcheting up the media and political campaign vilifying the Islamic Republic. 

Seemingly fallen on deaf ears over the years are the more moderate voices that have taken pains to point out the bias and rhetoric in accounts of the weaponization of Iran’s nuclear ambitions, as Tehran has steadfastly maintained it seeks nuclear technology for energy production and scientific research. The International Atomic Energy Agency’s latest report implicating Iran, for example, was widely discredited by experts, including former United Nations weapons inspector Hans Blix — but you wouldn’t have known this from reading the headline news.

So, will there be a war? The multi-national military build up in the Gulf is certainly worrying, but like the past responses to “Iran nearly has nukes” reports, it is not unprecedented. The European Union announcing sanctions on Iranian oil — ostensibly meaning it is sourcing alternative energy supplies to avoid a shortage in the advent of a conflict — is a major move that has raised the stakes, yet it is also clearly economic and political maneuvering to put pressure on Tehran. Israel, as usual, is the wild card, being the most vocally gun-ho to ‘take out’ Iranian nuclear facilities and retain its regional nuclear supremacy, while Washington still appears intent to keep “all options on the table” for the immediate short-term. With so much saber rattling and so many military maneuvers broiling hostilities across the Gulf right now, however, one has to hope that a misunderstood action or incidental blunder does not set off a chain reaction of unintended consequences. 

Let’s be clear though: the shepherd boys crying out through the media that the bombs will begin dropping tomorrow are charlatans, not fortunetellers. That the world has had to listen to them for so long, however, is massively worrying, for when the wolf of war actually is nigh and those who see it coming raise the alarm, who among us will believe them?