Mr. James P. Covey Special Assistant to the President
for National Security Affairs National Security Council
attached memorandum addresses the recent escalation of Iraqi attacks in the Gulfhought you might find it of interest. We believe the Iraqis are likely to increase their attacks further this spring as work of theirircraft becomes operational. We estimate Iraq probablyuff.Exgcet missiles totepped-up campaign against Iranian shipping, although "our evidence is far from conclusive. So long as Iran does not increase Its own retaliation, the effect on the world oil marketikely to be limited.oft oil market and stepped-up Iraqi attacks, however, are likely to cause increased
economic problems for Iran.
APPROVED FOR FiLLUlSE
obu: aug nn
DIRECTORATE OF INTELLIGENCE5 IRAQ-IRAN: Stepping Up the Pressure in the Gulf
Last month Iraq resumed shipping attacks in theat record levelsix week lull. rate of attacks is another stage inof gradually escalating pressure on Iranian Me expect the tempo of Iraqi strikes tothis spring once all of itsircraftajor uncertainty is^ExoCTc^isslierto^eViffl" it to continueprolonged period.
Iran has retaliated by hitting only three ships, well below the level of Iraqi strikes, and Iran's response is likely to remain limited as long as it can maintain oil exports. In addition to its dwindling air capability to (Jeferirf against and launch shipping attacks, Tehran apparently is aware that its retaliatory strikes make ship owners even more reluctant to call on any port in the Gulf, including Khark Island. Iran, however, will need to boost oil discounts to offset the higher insurance rates in order to maintain oil shipments from Khark Island. Iran also is settingystem to shuttle oilransloading facilitytH>puth'ern'Gulf and is increasing its oil storage capacity at another export facility in order to reduce its dependency on Khark.
NOTICE INTELLIGENCE SOURCES OR METHODS INVOLVED
UtU UAUK DRV FROM Multiple
If Iraqi attacks were to seriously impede Iranian oil exports,Iran to retaliate against Iraq's JauU. allies. The world oil market could compensateoss of Iranian, Iraqi, and Kuwaiti crude, but any Iranian action that disrupts Saudi exports would drive prices up sharply.
Iraqi aircraft have attacked or attempted to attack tankers calling at Khark Island an average of every other day for the past five weeks. Iraq claims it has hithipsecember and AWACS reporting indicates Iraqi jets have searched for targets unsuccessfully six times. Strikes against five tankers and three cargo_^hips have been confirmed; two of the tankers were seriously damaged.
Iraq istrategy ol* phased escalation begunonths ago when Baghdad first threatened an economic blockade. In4 it flew an "armed reconnaissance" flight with Super Etendard aircraft near Khark Island and the following month began regular attacks on tankers. With only five Super Etendard aircraftautious war strategy, however, these shipping attacks have failed to reduce significantly Iran's oil exports. Me believe that weak oil demand is the major reason Iran'soil exports fellarly last yearn
Iraqi Attacks This Coming Spring
The delivery of twenty Exocet-armedircraft from France is due to be completed early this year, enabMna flo increase the frequency of its attacks, f
We expect Baghdad to begin usingsustained basis over the Gulf this spring when the weather becomes more favorable to air operations. Baghdad probably believes that an increase in strikes from the average ofeek ino the four or more per week mounted or attempted in Oecentoer and early January willignificant reduction of Iranian oil exports. Baghdad could damage Iran's economy further by launching airstrikes on other Iranian economic targets such as oil refineries and internal oil pipeline and pumping facilities if the current escalation fails to achieve this goal. Iraqi leaders have recently hinted that they may begin striking other economic targets should their campaign in the Gulf fail to force Iran to the negotiating table.
Major attacks against facilities on Khark Island however, areast resort.Baghdad
this month that, althodgn Iraq was prepared to lose dp to db aircraft in sustained attacks on Khark, Baghdad did not intend to launch an all-out campaign against the island because it would be toohock to Western economies. The real reason may be that Iraq's capability to hit Khark is more effectivehreat than if it is implemented. The Iraqis would probahly
have to sacrifice more thanircraft to close down thedefended island for an extended period.
France has supplied aerial refueling pods with thes_ enabling the planes to operate at much longer ranges over the Gulf.
f. AltMUjjns uu--
not need refueling pods to operate near Knarx, tne pods could enables to attack ships around Iran's Sirri and lavan oil terminals near the Strait of Hormuz. s also will allow Iraq to use less caution In choosing targets since they are faster, more manueverable, and more survivable in air combat than the Super Etendard.
The number of Exocet missiles in the Iraqi inventoryajor uncertainty to us and could constrain Iraq's strategy. Baghdad acoarently is concerned about the rate of supply. In December, Iraq pressed Paris for several hundred additional missiles to be delivered as soon as possible, bt as of mid-December the rate of delivery had apparently not changed.
He estimate the Iraqis havexocet missiles on hand.
in dooilion, we est mate if
s'srm at TIP beginning1 and we have good inforawtion that aboutissiles were delivered with the Super Etendards and anotherissiles with the initial deliveries of Exocet-armedircraft. This suggests that the French have deliveredxocet missiles to Iraq since the. Analysis of fairly good informationariety of sources suggests Iraq has firedxocets during the war, hittinghips. Allowing for some error and needed missile repair, this would put the current Iraqi stockpile atissiles.
A stockpile of this size, combined with future, possibly stepped up, deliveries, would enable Iraq toelatively high level of snipping attacks this coming spring and summer and still maintain an emergency supply of missiles. If our estimate is too high, however, Iraq could face severestraints on its ability to escalate attacks on shipping bound for Iran.
A number of other factors could also cause temporary lulls in Iraqi strikes. Theombination is new and technical difficulties could force the periodic grounding ofs. Weather conditions also willactor in Iraq's attack schedule. Public statements by Iraqi leaders last November suggest that the six-week lull in attacks last fall could have resulted from poor weather. In addition, the Iraqis may attempt to calibrate the intensity of their strike schedule to Iranian military activity along the front. Another limiting factor in the pace of Iraqi attacks is Baghdad's agreement not to hit tankers when Turkish ships are callinq at Khark.
Tehran hasolicy of responding in kind to Iraqi attacks, it limited its retaliation to onlyhip attackshree of these took place in December in response to Iraq's stepped up campaign. Me Believe Tehran has concluded that its attacks on ships only further Iraq's strategy of making the Gulf unsafe for shipping calling on Iran.
expect Iran to only occasionally retaliate against ships calling at Gulf Arab ports. The Iranians are not likely to be any more successful than in the past in trying to intercept attacking Iraqi aircraft. 4 they apparently were able to damage only one Super Etendard. Me believe Iran realizes that it is unable to forestall Iraqi attacks byaircraft or by retaliating against shipping elsewhere in the Gulf.
inese measures, however, cannot orrset the loss of all exports from Khark Island. I
Since early December the cost of moving and insuring oil cargoesIsland has risenoer barrel. Iranneed to discount oil by5 per barrel to offset theseand transport costs in order to maintain salesoft market. export levels such discounts would5 exchange earningsby as much asercent froma poor revenue year. to pressure for oil price cuts would be even more damaging Last August, Iran's unwillingness to offer more concessionssales and earnings to drop almostercent.
Iran's economy has not yet been seriously threatened by the step up in Iraqi attacks, but Tehran is likely to have problems coping with still lower oil revenues. Reduced oil income4 caused the regime to cut back both imports and domestic spending despite commodity shortages and high unemployment. Even with import cuts, Iran was forced to draw down its foreign assets to their lowest point of the war. Minimal assets and lower oil revenues will mean an erosion of living standards amid existing signs of domestic dissatisfaction with the performance of the economy. I-
A strong Iranian retaliatory response is probable if Baghdad's stepped up attacks were to reduce Iranian oil revenues significantly. Iran apparently is already prepared to react more strongly if necessary. Iran may have4 aircraft armed with standard missiles in its shipping attack onecember. Twopparently provided air cover for the attacking aircraft. The willingness of Tehran to commito the shipping war indicates Iran may have decided to begin responding more forcefully to Iraqihould be more effective in locating ships and defending themselves from attacking aircraft thens Iran has used in previous shipping strikes.
Iran continues to monitor ships in the Gulf region and keeps track of their locations for possible attacks.
If Iran increases its retaliation, Saudi Arabia and other Gulf states will probably be forced to reestablish restrictions on tanker arrival and departure times, and more buyerse forced toremium for loading crude at the Saudi Red Sea outlet. I
Tehran could also mine the ports of Iraq's Gulf allies. Iranian efforts toine warfare capability have increased in the past year and Tehran could probably lay enough mines to raise insurance rates and deter shipping to Gulf ports. Kuwait would probablyrime target since mining its waters would reduce oil exports as well as the flow of arms to Iraq. Iran probably would not mine the Strait of Hormuz unless almost all of Its own shipping were stopped because of its dependence on that strategic waterway.
Iranian sabotage or air strikes against Arab Gulf states and increased terrorism worldwide are also possible responses. Tehran has trained Gulf Arabs and probably has some in place to carry out some operations. Host of the oil exported from Saudi Arabia, Kuwait, and Abu Dhabi passmall number of critical facilities that are susceptible to sabotage. Tehran also could increase its terrorist campaign worldwide in hopes of deterring countries from aiding Iraq. France wouldrime target for these attacks since Iraq is using French equipment to attack ships.
Oil Market Response
Oil exports from the Persian Gulf probably can be maintained nearif producers adopt precautions and countermeasures similar tolast summer, even if attacks continue at current rates. So farbuyers do not view the threat to oil supplies from the latest surgeattacks as troublesome enough to reverse countervailing Continuing weak demand and thengness of oil exportersprices and exceed OPEC imposed production quotas have kept oil Widespread surplus capacity and the growth of governmentconsumer confidence in an ample supply. arm start to theOPEC's latest difficulties in restraining output add tostrong prospects for further price slippage, buyers are loathe to bidand risk lossescarcity fails to materialize.
Even if Baghdad can sustain its current level of attacks Tehran is not likely to agree to serious negotiations and Gulf oil exports probably will not be reduced significantly. In our view, an escalation of the conflict that does not significantly affect the availability of Saudi oil would notajor, lasting effect on oil prices.
Iran, not Iraq, poses the main threat to the world oil market. Concentrated Iranian retalitory attacks against either shipping or oil exporting facilities that threaten Saudi and other Gulf exports would have an immediate impact on the the market. oss of oil shipments from all Persian Gulf terminals could remove about sixrom thethan double surplus productive capacity outside the Gulf--even if the Iraq-Turkey and Saudi East-West pipelines are still operating. Such an event would drive prices up sharply. The severity of .the impact would depend on stock use and expectations about the length of the disruption
For the time being, however, we expect Tehran to concentrate on alternate ways to export its oil and not on increased retaliation. Iran probably will continue its current rate of two or three shippingonth. Iran's economy is not threatened as long as Tehran fs willing to offer discounts to move its oil. arge price drop along with an increase in the effectiveness of Iraq's shipping attacks, however, would present serious problems for Iran's
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