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SEP 9
EscalatingThreats to Oil Flows
Despite current oil market calm, the risks to shipping have escalated since the early days of the tanker war dueariety of factors and, in our view, the oil market remains vulnerableupply disruption. 2/ Acquisition by Iran of the Silkworm anti-ship missile, which has substantially more destructive capacity then Exocet missiles, has increased concern about potential loss of life and oil supplies. Iran has not yet used this missile against tankers, but it may be capable of sinking crude carriers! Iraq also has acquired weapons with substantially more destructive capability. Moreover, the Iranians apparently have placed mines in channels approaching Kuwait's major export terminal at Hina al-Ahmadi in recent weeks, which hasew threat to shipping. This threat was sufficient to at least temporarily halt liftings by Japar^se-crewed tankers feem the Neutral Zone.
Iranian rhetoric has become increasingly belligerent since discussions of Kuwaiti chartering of three Soviet vessels and Kuwaitl-OS plans to reflag il vessels became public. Iran has in the past year been implicated in several terrorist attacks against Kuwait's oil facilities. More than two-thiros of the excess production capacity that has helped to keep the market calm is in the Persian Culf and these attacks have demonstrated again the vulnerability of these facilities to sabotage. Gulf countries with significant Shi'a populations have been reminded of the potential internal danger from radical elements supported by Iran. We believe the escalating tensions and uncertainty about future Iranian actions and superpower responses haveeaction ln the oil market ln recent months- spot oil prices probably are slightly higher than would otherwise be the case, and some precautionary building of commercial atocks may be occuring.
Iran and the Superpower*. Iran fundamentally opposes Kuwait'snd the increased US-USSR presence In the Culf. We cannot accurately predict Iranian actions but,inimum, Tehran wants to intimidate Kuwait into withdrawing ilk request to the superpowers for assistance, Iranide variety of options in acting to achieve its goals. Some of these includet
about events
causetemporary risein spot oil prices, even without a
physical supply shortfall.
U"all of Its air, naval, and
terrorist capabilities to attack tankers, appear to mine the Strait
?Lnunh^ fw'J?critical oil installations
n frw world
attack that would seriously disrupt oil flows. Effective terrorism or sabotage strikes, however, are well within Iran's ability. Also, Saudi, Kuwaiti, and other Gulf state oil facilities remain vulnerable to Iranian attack despite efforts to improve protection An Iranian decision to act, and effective strikes against Saudi export terminals at Ras Tanura and Ju'ayaah, could limit Saudi exports to lesshrough Yanbu on the Red Sea. An attack on Saudi facilities and disruption in Gulf exports through th* Straitov*f oil supplies from th*than doubl* surplus capacity outside th* Gulf. Assuming Iran was unable to repeatrompt repair effort could partially restore oil flows within several months. HL.IBI
Market Implications
In our judgment, th* probabilityupply disruption svrious enough tooss to world oil supplies is lowranian military capabilities, current market conditions, and potantial offsets. The market reaction to an escalation of attacks on shipping or an all-out Iranian attack on oil facilities in other Gulf states would depend on several key factorsi th* actual physical loss of supplies or production capability] expectations
about further damage; expectations about the duration of the supply loss; US, Allied and Cul^states responses, including decisions on the use of oil stocks. B M
Evenet supplyemporary price rise would result froa the psychological market reaction. In the less likely eventajor disruption that includes Saudi Arabia and other northern Gulf producers, the market wouldet supply shortfall snd the price Impact would be much greater. The price increase would depend both on the length of the disruption and the extant to which oil production capacity was repaired to predlsruption levela. We cannot accurately predict how high world Oil prices night rise in this case, because the oil market has never experiencedubstantial supply loss. Tha economic losses to consuming nations, however, would be substsntial.
Original document.
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