Oil prices appear to be stuck in the $50s per barrel, but that doesn’t mean there aren’t serious supply risks to the market.
An unexpected disruption could occur at any moment, as has happened in the past, leading to a sudden and sharp jump in prices. Geopolitical tension has been largely irrelevant since the collapse of oil prices in 2014, but it’s making a return now that cracks have emerged in some key oil-producing nations. The threat of an outage will carry more weight as the oil market tightens.
"The 'Fragile Five' petrostates—Iran, Iraq, Libya, Nigeria and Venezuela—continue to see supply disruption potential, with northern Iraq crude exports at risk due to an escalation of tensions between the (Kurdistan Regional Government), Baghdad and Turkey, while the United States has decertified the 2015 Iran nuclear deal," U.S. bank Citi said.
Indeed, five prominent oil-producing nations are beset with challenges, for varying reasons, all of which could spring a surprise on the oil market without any advanced notice.
Iraq. The most near-term supply risk comes from Iraq. The surprise seizure of Kirkuk’s oil fields by the Iraqi government has already disrupted some oil shipments. The Bai Hassan and Avana oil fields near Kirkuk remained shut as of October 19, keeping at least 275,000 bpd offline. The outages are expected to be temporary; a source told Reuters last week that they’re seeking certain equipment to bring the fields back online. An agent at the Turkish port of Ceyhan—the destination for Iraq’s northern oil exports—told Bloomberg that flows fell to 196,000 bpd as of October 19, implying an outage of about 400,000 bpd. Iraq represents the most obvious near-term threat to global supplies, but because the bulk of the country’s output is located in the south, far from the unrest, the potential outage is likely capped at 600,000 bpd, and would probably be temporary.
Iran. This one’s probably the biggest question mark on this list, and is in a much stronger position than its more fragile peers. The danger to Iran is a return of U.S. sanctions, which are by no means a given. Even then, it’s unclear if the U.S. has the ability to curtail Iranian oil exports. It might scare away new investment, but even U.S. Secretary of State Rex Tillerson went to lengths recently to assure European officials that it wouldn’t block business between European companies and Iran. Goldman Sachs estimates that in a relatively worst-case scenario of a return of U.S. sanctions, a few hundred thousand barrels of oil exports would be at risk—not the more than 1 mb/d of disrupted exports due to sanctions before the nuclear deal. At this point, though, potential outages are too hypothetical to be taken seriously. Iran probably won’t pose a supply risk to the market, at least not this year.
Libya. The North African OPEC member was exempted from the OPEC deal, and for much of the past year has represented a downside risk to oil prices, not an upside one. That is because it has nearly tripled its output from about 300,000 bpd in August 2016 up to about 850,000 bpd currently, down a bit from a recent peak at over 1 mb/d. But damage to some export terminals likely means that near-term production has a ceiling at about 1.25 mb/d, meaning Libya won’t be able to bring output back to pre-war levels of 1.6 mb/d. But because current output is now taken for granted and already baked into global pricing calculations, Libya now represents a supply risk to the market because an outage is entirely realistic due to ongoing instability. The country is nearing its ceiling for production, while there’s plenty of room for it to fall back.
Nigeria. The story here is similar to Libya. It was also exempted from the cuts because violence and instability previously knocked a sizable portion of output offline. But Libya’s restoration of output coincided with a similar reduction in violence in the Niger Delta. A ceasefire brought calm for much of the past year, allowing production to rebound from a low point of 1.2 mb/d last year, back up to 1.8 mb/d currently. Potential for further output gains is probably limited, not least because the country promised to limit production when it hit 1.8 mb/d. Meanwhile, peace in the Niger Delta remains fragile, and reports that militants have grown frustrated with the pace of talks with the government raises concerns about a return to violence. The rebound in Nigerian production is not assured.
Venezuela. The unfolding implosion of Venezuela almost ensures that more of the country’s oil production will erode, perhaps at a quickening pace. As of September, Venezuela only produced 1.89 mb/d, down from 3.2 mb/d in the late 1990s, but also down from nearly 2.4 mb/d as recently as 2015. Without cash, state-owned PDVSA can’t invest in new production and can’t even invest in maintenance to keep existing production from falling. Reports have surfaced suggesting that even the oil that is produced is suffering from declining quality, as PDVSA doesn’t have the means to properly treat its heavy crude. Worse, with huge debt payments coming due in the next few weeks, a debt default is possible. All of this adds up to a further deterioration in the country’s oil output.
On Aug. 21, Israeli Channel 2 Television aired a recording of Ehud Barak, Israel's former defense minister and former prime minister, saying that on three separate occasions, Israel had planned to attack Iran's nuclear facilities but canceled the attacks. According to Barak, in 2010 Israel's chief of staff at the time, Gabi Ashkenazi, refused to approve an attack plan. Israeli Cabinet members Moshe Yaalon and Yuval Steinitz backed out of another plan, and in 2012 an attack was canceled because it coincided with planned U.S.-Israeli military exercises and a visit from then-U.S. Defense Secretary Leon Panetta.
The fact that the interview was released at all is odd. Barak claimed to have believed that the tape would not be aired, and he supposedly tried unsuccessfully to stop the broadcast. It would seem that Barak didn't have enough clout to pressure the censor to block it, which I suppose is possible.
Yaalon, like Ashkenazi, was once chief of staff of Israel Defense Forces but was also vice premier and Barak's successor as defense minister. Steinitz had been finance minister and was vocal in his concerns about Iran. What Barak is saying, therefore, is that a chief of staff and a vice premier and former chief of staff blocked the planned attacks. As to the coinciding of a U.S.-Israeli exercise with a planned attack, that is quite puzzling, because such exercises are planned well in advance. Perhaps there was some weakness in Iranian defenses that opened and closed periodically, and that drove the timing of the attack. Or perhaps Barak was just confusing the issue.
A number of points are worth noting: Ehud Barak is not a man to speak casually about highly classified matters, certainly not while being recorded. Moreover, the idea that Barak was unable to persuade the military censor to block the airing of the recording is highly improbable. For some reason, Barak wanted to say this, and he wanted it broadcast.
Part of the reason might have been to explain why Israel, so concerned about Iran, didn't take action against Iran's nuclear facilities. Given the current debate in the U.S. Congress, that is a question that is undoubtedly being asked. The explanation Barak is giving seems to be that senior military and defense officials blocked the plans and that the Israelis didn't want to upset the Americans by attacking during a joint exercise. The problem with this explanation is that it is well known that Israeli military and intelligence officials had argued against an Israeli strike and that the United States would have been upset whether or not joint exercises were occurring.
It would seem, intentionally or unintentionally, that Barak is calling Israeli attention to two facts. The first is that militarily taking out Iranian facilities would be difficult, and the second is that attempting to do so would affect relations with Israel's indispensible ally, the United States. Military leaders' opposition to the strikes had been rumored and hinted at in public statements by retired military and intelligence heads; Barak is confirming that those objections were the decisive reason Israel did not attack. The military was not sure it could succeed.
The Potential for Disastrous Failure
A military operation, like anything else in life, must be judged in two ways. First, what are the consequences of failure? Second, how likely is failure? Take, for example, the failure of the U.S. hostage rescue operation in 1980. Apart from the obvious costs, the failure gave the Iranian government reason to reduce its respect for U.S. power and thus potentially emboldened Iran to take more risks. Even more important, it enhanced the reputation of the Iranian government in the eyes of its people, both demonstrating that the United States threatened Iranian sovereignty and increasing the credibility of the government's ability to defend Iran. Finally, it eroded confidence in U.S. political and military leaders among the U.S. public. In reducing the threat and the perception of threat, the failure of the operation gave the Iranian regime more room to maneuver.
For the Israelis, the price of failure in an attack on Iranian nuclear sites would have been substantial. One of Israel's major strategic political assets is the public's belief in its military competence. Forged during the 1967 war, the IDF's public image has survived a number of stalemates and setbacks. A failure in Iran would damage that image even if, in reality, the military's strength remained intact. Far more important, it would, as the failed U.S. operation did in 1980, enhance Iran's position. Given the nature of the targets, any attack would likely require a special operations component along with airstrikes, and any casualties, downed pilots or commandos taken prisoner would create an impression of Israeli weakness contrasting with Iranian strength. That perception would be an immeasurable advantage for Iran in its efforts to accrue power in the region. Thus for Israel, the cost of failure would be extreme.
This must be measured against the possibility of success. In war, as in everything, the most obvious successes can evolve into failure. There were several potential points for failure in an attack on Iran. How confident were the Israelis that their intelligence on locations, fortifications and defenses were accurate? How confident were they that they could destroy the right targets? More important, perhaps, how certain could they be that the strikes had destroyed the targets? Finally, and most important, did they know what Iran's recuperative capabilities were? How quickly could the Iranians restore their program? Frequently, an operationally successful assault does not deal with the strategic problem. The goal of an attack was to make Iran incapable of building a nuclear weapon; would destroying all known targets achieve that strategic goal?
One of the things to bear in mind is that the Iranians were as obsessed with Israeli and U.S. intelligence efforts as the Israelis and Americans were obsessed with the Iranian programs. Iran's facilities were built to be protected from attack. The Iranians were also sophisticated in deception; knowing that they were being watched, they made efforts to confuse and mislead their observers. The Israelis could never be certain that they were not deceived by every supposedly reliable source, every satellite image and every intercepted phone call. Even if only one or two sources of information were actually misleading, which sources were they?
A failed Israeli assault on Iran would cause a major readjustment among other regional players in the way they perceive Israel and Iran. And for Israel, the perception of its military effectiveness is a strategic asset. There was a high risk of damaging that strategic asset in a failed operation, coupled with a strong chance that Israeli actions could unintentionally bolster Iran's power in the region. The likelihood of success was thrown into question by Israel's dependence on intelligence. In war, intelligence failure is a given. The issue is how great the failure will be — and there is no way to know until after the strike. Furthermore, operational success may not yield strategic success. Therefore, the ratio of potential risk versus reward argued against an attack.
Considering Iran's Capabilities
There is another side to this equation: What exactly were the Iranians capable of? As I have argued before, enriched uranium is a necessary but insufficient component for a nuclear weapon. It is enough to create a device that can be detonated underground in controlled conditions. But the development of a weapon, as opposed to a device, requires extensive technology in miniaturization and ruggedization to ensure the weapon reaches its target. Those who fixated on progress in uranium enrichment failed to consider the other technologies necessary to create nuclear weaponry. Some, including myself, argued that the constant delays in completing a weapon were rooted both in the lack of critical technologies and in Iranian concerns about the consequence of failure.
Then there is the question of timing. A nuclear weapon would be most vulnerable at the moment it was completed and mounted on its delivery system. At that point, it would no longer be underground, and the Israelis would have an opportunity to strike when Iranians were in the process of marrying the weapon to the delivery device. Israel, and to an even greater extent the United States, has reconnaissance capabilities. The Iranians know that the final phase of weapon development is when they most risk detection and attack. The Israelis may have felt that, as risky as a future operation may seem, it was far less likely to fail than a premature attack.
Barak's Motivations
Whether intentionally or not (and I suspect intentionally) Barak was calling attention, not to prior plans for an attack on Iran, but to the decision to abandon those plans. He pointed out that an Israeli chief of staff blocked one plan, a former chief of staff blocked a second plan and concern for U.S. sensibilities blocked a third. To put it in different terms, the Israelis considered and abandoned attacks on Iran on several occasions, when senior commanders or Cabinet members with significant military experience refused to approve the plan. Unmentioned was that neither the prime minister nor the Cabinet overruled them. Their judgment — and the judgment of many others — was that an attack shouldn't be executed, at least not at that time.
Barak's statement can be read as an argument for sanctions. If the generals have insufficient confidence in an attack, or if an attack can be permanently canceled because of an exercise with the Americans, then the only option is to increase sanctions. But Barak also knows that pain will not always bring capitulation. Sanctions might be politically satisfying to countries unable to achieve their ends through military action or covert means. As Barak undoubtedly knows, imposing further restrictions on Iran's economy makes everyone feel something useful is being done. But sanctions, like military action, can produce unwelcome results. Measures far more painful than economic sanctions still failed to force capitulation in the United Kingdom or Germany, and did so in Japan only after atomic weapons were used. The bombing of North Vietnam did not cause capitulation. Sanctions on South Africa did work, but that was a deeply split nation with a majority in favor of the economic measures. Sanctions have not prompted Russia to change its policy. Imposing pain frequently unites a country and empowers the government. Moreover, unless sanctions rapidly lead to a collapse, they would not give Iran any motivation not to complete a nuclear weapon.
I don't think Barak was making the case for sanctions. What he was saying is that every time the Israelis thought of military action against Iran, they decided not to do it. And he wasn't really saying that the generals, ministers or the Americans blocked it. In actuality, he was saying that ultimately, Prime Minister Benjamin Netanyahu blocked it, because in the end, Netanyahu was in a position to force the issue if he wanted to. Barak was saying that Israel did not have a military option. He was not attacking Netanyahu for this decision; he was simply making it known.
It's unlikely that Barak believes sanctions will compel Iran to abandon its nuclear program, any more the current agreement does. My guess is that for him, both are irrelevant. Either the Iranians do not have the ability or desire to build a bomb, or there will come a point when they can no longer hide the program — and that is the point when they will be most vulnerable to attack. It is at that moment, when the Iranians are seen arming a delivery system, that an Israeli or U.S. submarine will fire a missile and end the issue.
If Barak didn't want a strike on Iran, if Netanyahu didn't want a strike and if Barak has no confidence in agreements or sanctions, then Barak must have something in mind for dealing with an Iranian nuclear weapon — if it ever does appear. Barak is an old soldier who knows how to refrain from firing until he is most certain of success, even if the delay makes everyone else nervous. He is not a believer in diplomatic solutions, gestures to indirectly inflict pain or operations destined for failure. At any rate, he has revealed that Israel did not have an effective military option to hamper Iran's nuclear program. And I find it impossible to believe he would rely on sanctions or diplomacy. Rather, he would wait to strike until Iran had committed to arming a delivery system, leaving itself wide open to attack — a nerve-racking solution, but one with the best chance of success.
An Iranian submarine during the Velayat 90 naval exercises in the Strait of Hormuz on Jan. 3
The Iranian air force announced Feb. 20 that it had begun a four-day drill covering a zone of 190,000 square kilometers (73,300 square miles) in southern Iran. The exercises, dubbed "Sarollah," would be held to counter "all possible threats, especially to public, important and nuclear centers." The exercises follow the Feb. 19 start of the Islamic Revolutionary Guard Corps' (IRGC) own "Valfajr" ground forces exercises in the deserts of central Iran.
Unlike the previously scheduled navy exercises in the Strait of Hormuz -- which Stratfor sources say have either been canceled or at the very least delayed -- these exercises appear to be largely defensive in nature and are taking place far from the Persian Gulf's critical oil artery, a much more provocative site for military drills. Though the additional drills demonstrate Iran's concerns about military readiness, it appears the Iranians are deliberately restraining themselves in these maneuvers, which would be consistent with Tehran's efforts to reduce tensions and re-energize negotiations with the United States.
During the Sarollah exercises, Iran's air force will seek to improve the integration and cooperation of Iranian surface-to-air missile systems, anti-aircraft artillery, radar systems and warplanes that belong to both the Iranian air force as well as the IRGC. The IRGC's Valfajr exercises involve ground maneuvers by engineer and armor units in the central Markazi desert near the city of Yazd. According to IRGC commander Brig. Gen. Mohammad Pakpour, the drill is the last phase in a series of war games attended by infantry units and some Basij members (an Iranian plainclothes militia), which were intended to transfer the lessons learned during the Iran-Iraq War to younger troops.
In contrast to the Velayat 90 naval exercises held Dec. 24-Jan. 3 in the Gulf of Oman and Strait of Hormuz and the previously planned Great Prophet VII naval maneuvers slated to take place by Feb. 19 and apparently delayed, the current exercises are being held near the center of the country and far away from the politically volatile Persian Gulf, Strait of Hormuz and Iran-Afghanistan border. The ground maneuvers and heavy emphasis on air-defense also highlight the largely defensive nature of these exercises.
On Feb. 12, Pakpour announced that the IRGC planned to stage new military exercises before the end of the current Iranian calendar year on March 20. It is not clear whether he was referring to the Great Prophet VII exercises or another planned drill -- the Iranians regularly obfuscate these sorts of announcements. However, a Stratfor source said the exercises Pakpour discussed were originally supposed to last until the beginning of March but will now be carried out for only two days. The source explained that these changes are intended to signal a major de-escalation in Iranian posturing. Considering that on Jan. 15, the United States also postponed military exercises with Israel originally scheduled for April, the Iranian downgrade of these exercises could represent a reciprocal gesture and one consistent with the overall Iranian effort toward reducing tensions with Washington in order to facilitate backchannel negotiations.
After years of war-induced economic stagnation, Iraq is showing the potential to dramatically increase its capacity to export oil in anticipation of higher oil production. With much of this oil and infrastructure development taking place in Iraq's Shiite-concentrated south, the biggest external beneficiary of Iraq's increased oil output would be Iran. Through a web of alliances including Iraqi politicians, unions, oil syndicates and militias, Iran is already well-positioned to extract oil revenues from southern Iraq via informal channels. This allows Iran to draw from a large stash of resources to maintain its regional influence while insulating itself against an intensifying sanctions campaign targeting Iranian oil exports.
Analysis
Over the past couple of years, oil production in Iraq's Shiite-majority southern region has been steadily rising because of production in the Rumaila, West Qurna Stage 1 and Zubayr supergiant oil fields that were auctioned off to foreign companies in 2009. Sitting on 115 billion barrels of proven oil reserves, more than 80 percent of which is concentrated in the south, Iraq has the potential to rival Saudi Arabia's production rate of roughly 10 million barrels per day (bpd) within the decade.
Iran is especially interested in the prospect of increased oil production in southern Iraq. Tehran has built a complex oil smuggling network that allows it to bring in significant revenues from southern Iraq's oil production. These funds enable Iran to maintain its influence in the region while preparing to defend itself against more stringent sanctions against its oil exports.
Southern Iraq's Oil Expansion Plans
Most of Iraq's oil lies in large and shallow oil fields very close to the coast on transit lines that do not cross population centers. This makes the oil relatively easy and inexpensive to extract and thus highly profitable. But years of sanctions, war and insurgency have dilapidated the country's energy infrastructure. According to oil-pricing agency Platts, Iraqi oil production rose to an average 2.653 million bpd in 2011, a 12 percent increase from 2010's average of 2.364 million bpd. Iraqi Oil Ministry data indicates that the country has a production capacity of around 2.9 million bpd, with ongoing efforts to meet a production target of 3.4 million bpd by year's end. The problem is that Iraq has not completed the critical upgrades to its export and storage infrastructure necessary to cope with a significant rise in production. Southern Iraq's oil production is thus largely limited to what it can export, which is roughly 1.89 million bpd.
To alleviate this bottleneck, Iraq is planning an ambitious project to expand the export capacity of Basra's oil terminals to about 4.8 million bpd by 2014. Four single-point mooring facilities, each expected to add another 850,000-900,000 bpd in export capacity, are to be completed by 2014. The project has encountered repeated delays: An inauguration ceremony for the first terminal scheduled for Jan. 25 has been postponed for a third time, though a member of Iraq's southern export expansion team told Reuters that the terminal would be ready to receive crude vessels in February after pipeline connections and testing were completed. The second terminal is scheduled to be ready within six months, the third by the end of 2012 and the fourth by the end of 2013.
Iran's Stake in Iraq's Oil
Though it is unlikely that Iraq will be able to meet all its production targets and project deadlines, there is no doubt that it has a chance to significantly elevate its energy status in a relatively short time. Because much of this energy activity is taking place in Iraq's mostly Shiite-populated south, in close proximity to the Persian Gulf, the country most focused on Iraq's energy prospects is Iran.
When the United States completed its military withdrawal from Iraq at the end of 2011, it left the door open for Iran to consolidate its influence in an energy-rich country at the heart of the Arab world. The influence of Iran, a predominantly Shiite state itself, is most entrenched in Iraq's Shiite-majority south. Though many Shiite Iraqi politicians are opposed, Iran's geopolitical ambition is to make southern Iraq an extension of itself, thereby allowing Iran to vastly, albeit indirectly, increase its share in the global energy market. With the U.S. sanctions campaign against Iran intensifying, this is an especially critical goal for Tehran.
Iran is well-positioned to reap the benefits of increased Iraqi oil production. According to Stratfor sources, roughly 10 percent of Basra's oil production is smuggled, most of which ends up in Iran for export. The market value of the oil that is stolen each day is roughly $20 million, providing a significant source of funds from which Iran can draw to protect itself against sanctions.
The Iraq-Iran Smuggling Route
The main smuggling route from Iraq to Iran begins at the Khor al-Zubayr oil terminal, where the bulk of Iraq's southern oil converges. Smugglers will drill holes in the pipeline at the oil terminal and load containers of oil into small boats. The boats are manufactured locally in Basra and typically carry between 70 and 120 barrels of crude. From there, the boats take the crude down the Khor al-Zubayr waterway out to the Persian Gulf, where it is loaded onto tankers bound for Iran.
Thefts also occur farther down the smuggling route near al-Faw Peninsula, where smugglers make holes in underground pipelines, using hydraulic perforation equipment to avoid fires. Much of the oil leaks into artificial lakes in the area, where tankers come and load it. From the al-Rasas island near al-Faw Peninsula, crude can travel by boat up the Bahmanshir River (a tributary of the Karun River) to the Abadan refinery in Iran for processing and export.
Oil smuggling along the river known as the Shatt al-Arab also occurs, though it is much less common due to the hazardous nature of the waterway and increased monitoring along the route. High-speed Iraqi boats are used to travel along the Shatt al-Arab to Iranian territorial waters to unload their cargo, but the route is costly due to the number of bribes that need to be paid along the way.
Rampant smuggling has long been a characteristic of Iraqi oil production, so it makes sense that current infrastructure and business practices in southern Iraq allow ample room for oil theft. Metering systems to gauge oil flow and detect disruptions are more prevalent in the Basra and Khor al-Zubayr ports but are largely absent along the rest of the oil transit route. Many of the meters are damaged and deliberately not repaired to facilitate smuggling. Moreover, Basra oil officials involved in the illicit oil trade are known to play a role in delaying repairs to holes in pipelines to give the smugglers more time to operate.
Iran's Oil Smuggling Network in Iraq
Iran has an extensive network of politicians, oil unions and cartels, and militias that it uses to reap the benefits of Iraq's southern oil production. The multiple players and complex ideologies that make up Iraq's Shiite landscape require Iran to devote a lot of time and resources to managing the various stakeholders in Iraq's southern oil industry. This variety also allows Iran to play the different sides off one another to preserve its control over the oil smuggling network.
Political Groups
Ideally, Iran would like to see southern Iraq evolve into a single, Shiite-dominated state within an Iraqi federation that would serve as an Iranian satellite. Theoretically, such a state would allow Iran to carve out a more defined sphere of influence among the Iraqi Shia to help manage important tasks such as distributing revenues from the oil smuggling network. Iran's desire for a distinct Shiite state in Iraq may explain why Iran's closest political ally, the Islamic Supreme Council of Iraq, has been the Iraqi parliament's strongest proponent for establishing a single Shiite region in the south. However, the majority of the Shiite groups in the south, such as the Dawa Party, the Sadrite movement and the al-Fadhila party, have opposed the idea. These groups work closely with the Iranians but are more nationalist and still see a need to preserve political autonomy from Iran.
Al-Fadhila is the most entrenched in Iraq's oil smuggling business. Basra residents are even known to refer to al-Fadhila, which means "virtue" in Arabic, as the "Islamic Oil Party." The party is firmly Iraqi nationalist and has been highly resistant to Baghdad's attempts to bring more foreign energy expertise to the south for fear of seeing its regional clout undermined, but its leader, Sheikh Mohammad Yaqubi, is friendly with Iran. Al-Fadhila has a significant presence in the Southern Oil Company of Iraq and maintains a strong relationship with the trade union of workers in the Basra oil industry. The party will typically pay Southern Oil Company employees who collaborate with it in oil theft around $5,000-$10,000 per 1,000-barrel shipment. Al-Fadhila is also the leader in southern Iraq when it comes to using oil revenues to buy the allegiance of local political groups, gangs and the Basra police force.
Militias
Iran plays a significant role in managing the various militias involved in oil smuggling in southern Iraq. In return for protecting Iran's energy interests and eliminating resistance to the Iranian-run oil smuggling networks, the militias get a significant cut of the profits. When one militia grows too powerful, Iran will typically find ways to dilute its strength by developing competing splinter groups and integrating militia members into the security apparatus and sometimes even the political process. Iran's strategy of managing Iraq is to alter the key Shiite leaders it deals with, which ensures that no one becomes strong enough to consider abandoning or turning against Iran. This dynamic is illustrated in Iran's handling of Iraqi nationalist Shiite leader Muqtada al-Sadr and his Mehdi Army, Asaib Ahl al Haq (which splintered from the Sadrites with Iranian backing) and the rise of the Hezbollah Brigades in the Iranian oil smuggling network.
Al-Sadr and his following have traditionally been vehemently nationalist and have taken care to distance themselves from Iran. When Qais al-Khazali, who studied under al-Sadr's father, Grand Ayatollah Mohammed Sadiq al-Sadr, split from the group in 2004 to form his own faction, Iran developed a tight relationship with Khazali's group. Khazali eventually formed his own militia, Asaib al-Haq (League of the Righteous), with heavy Iranian financial and military assistance.
In 2007, al-Sadr fled to Iran in the face of threats from the U.S. military and his own Shiite rivals. Al-Sadr announced that he was deactivating the Mehdi Army in 2008 in exchange for entry into the Iraqi government. The Sadrites now hold 40 seats, a majority of the ruling Shiite coalition's seats in parliament, and control seven ministries, though al-Sadr remains under Iran's influence. Whereas at the beginning of the decade, the Sadrite movement enjoyed more autonomy in southern Iraqi affairs, the Promised Day Brigade, which evolved out of the Mehdi Army, now sits well within the Iranian sphere of influence.
While the clout of the Sadrites waned in the south and rose in the central government, Asaib Ahl al-Haq became the primary militia Iran would rely on to run its business in Basra. The militia has proved particularly effective in containing tribal resistance to Iran's operations in Basra, most of which came from Sheikh Kazim al-Unayzan, who leads the south clan council and whose following is said to exceed 3 million Shia. An illustration of Asaib Ahl al-Haq's utility to Iran was witnessed when tribal Sheikh Mohammad al-Bahadli, chief of the council of liberation and construction, formed his own militia called Asad Allah al Ghalib. This militia, according to a Stratfor source in the region, was quickly put down by Asaib Ahl al-Haq. Asaib Ahl al-Haq also has a reputation of liquidating Iran's rivals in the south, including clan leaders, officials at Basra and Umm Qasr ports, and employees of the Southern Oil Company of Iraq who refuse to cooperate in Iran's oil smuggling network.
In line with previous tactics, Iran appears ready again to diversify its militia assets and has played a key role in pressuring the Iraqi central government to welcome Khazali and Asaib Ahl al-Haq into the political process. In early January, the Iraqi government announced that Asaib Ahl al-Haq has not turned in its weapons but that it has agreed to lay them down and plans to participate in the next parliamentary elections under a new name.
With Asaib Ahl al-Haq entering the political arena, Iran has already prepped another key Shiite militant patron -- the Hezbollah Brigades -- to backfill Asaib Ahl al-Haq's role in protecting the oil smuggling business. The Hezbollah Brigades have not expressed any interest in entering the political process and have stressed the need to play a leading militant role in the south. Marginal groups that have an Islamist orientation and that have politically accommodated themselves to Iran in exchange for oil dividends include Harakat Sayyid al Shuada, Hizb Tha'r Allah al Islami, Shuhada al Mihrab, and the March 17 Party of Sheikh Abdullah al Ishmain.
Iran's Oil Syndicate
The main Iranian figure who manages the Basra oil syndicates is Gen. Qassem Suleimani, the commander of the Quds Force of the Islamic Revolutionary Guard Corps (IRGC). Suleimani plays a key role in buying patronage in Basra and the rest of the south using the revenues from stolen oil. Most of the money is deposited in branches of IRGC-owned banks in Iraq. Suleimani's network covers the tasks of arms smuggling, oil smuggling to Iran, the collection and dissemination of oil revenues, and the abduction (and sometimes assassination) of anti-Iranian figures in southern Iraq.
Tehran's Leverage over Baghdad
Iran's control over oil smuggling in Basra is institutionalized and well beyond the ability of the central government in Baghdad to control. Though Iran is in the process of consolidating Shiite influence in Iraq, it has no desire to see a strong central authority in Baghdad that could try to undermine its already well-entrenched leverage in the south. As a result, Iran has quietly but firmly resisted Iraqi Prime Minister Nouri al-Maliki's attempts to wield exclusive control over the government and his efforts to augment his military and political strength in the south. In fact, Iran's most effective way of ensuring its influence over the political authorities in Baghdad is by maintaining a strong grip over its oil smuggling operations in the south. Iran uses its energy clout in Iraq to ensure that Iraqi government authorities, including al-Maliki, get a hefty share of monthly revenues from the oil theft -- amounting to millions of dollars -- giving Baghdad less inclination to protest Iranian interference in Iraqi affairs.
Iran's significant and growing influence over Iraq's oil industry cuts to the heart of the U.S. challenge in trying to contain Iran in Iraq. When it comes to critical policy decisions on extending the U.S. troop presence in Iraq or in accepting major military assistance from the United States, Iran has ample financial might from the oil revenues it earns through smuggling to influence the minds of Iraqi decision-makers. Likewise, U.S.-led efforts to tighten sanctions and cut into Iran's bottom line fail to take into account the millions of dollars Iran is able to bring in daily through its shadowy channels throughout Basra.
Mounting Threats to Maritime Chokepoints in the Middle East
07:52 GMT, September 23, 2011 Maritime chokepoints are among the most sensitive locations where geography, trade, and politics meet. The challenges posed by Middle Eastern chokepoints, in particular, were evident even before the massive dependence on oil of the twentieth century. These points have become increasingly volatile in recent years, and especially since the Arab uprisings began. Complications include increased regional instability and aggravation of existing threats, pre-eminently piracy, terrorism, and the challenges posed by Iran.
PIRACY AND TERRORISM AS GROWING CONCERNS
Though states’ interests vary and are sometimes in conflict with one another, all value unfettered shipping. In recent years, the greatest regional threat to this common interest in the Red Sea, has been Somali piracy (although not exclusively). Much has been undertaken to address this ongoing problem. International efforts and resources, including the deployment of European, American, NATO, Chinese, Indian, Iranian, and other naval forces, coordinated commercial shipping movements, dedicated tracking and communications resources, and widespread adoption of anti-piracy practices have driven the attacks away from the Bab el-Mandab Strait further east along the Yemeni coast of the Indian Ocean (towards the Straits of Hormuz) and to the south of the Horn of Africa.[1]
Tactical measures have reduced (that is, displaced) the number of pirate attacks in the Red Sea in recent years. However, the strategic problem of failing states—of which piracy is only a symptom—may be getting worse at the sea’s two ends and in the middle. Somalia’s ongoing problems could prove to be just the tip of the iceberg. Current international anti-piracy efforts mainly target the symptom (i.e. attacks on the seas) and not the fundamental causes of the phenomenon.
Yemen has been racked by sectarian and tribal violence. In the last two years, it has become the adopted home of al-Qaeda in the Arabian Peninsula (AQAP). This is similar to how the political and economic conditions in Somalia proved to be a breeding ground for both piracy and the Islamist terrorist group al-Shabaab. Recent reports suggest that AQAP has seized control of areas along the Yemeni coast. While Yemen’s instability predates the large-scale demonstrations that swept across the Arab world in early 2011, an increasingly chaotic Yemen could make the country ever more attractive as a base for Somali pirates, expanding their already thriving black market for weapons.
While instability in Yemen, or even its collapse, would not lead inevitably to increased piracy on the Red Sea, it is a distinct possibility. This potential, combined with the global importance of undisturbed shipping through the area, suggest that the stability, security, and prosperity of these states provide a distinct shared interest.
Egypt is also a concern when it comes to maritime chokepoints. While the effective management and smooth operation of the Suez Canal and the Suez-Mediterranean (SUMED) pipeline remain a clear Egyptian interest, the country at present is experiencing its greatest political challenge in over half a century. Egypt’s poverty and governance problems pale in comparison to those in Yemen and Somalia, and the country appears an unlikely source of Red Sea piracy. Yet, Egypt is struggling with a restive Bedouin population in the Sinai Peninsula. In May 2011, an Egyptian security official claimed that over 400 Bedouin, Palestinian, and foreign Arab members of al Qaeda were in the peninsula. While Egypt dedicates significant resources to securing the Suez Canal, it is possible that the canal or the SUMED pipeline could become targets for future attacks. An attack on either site could hinder global transportation. This is not just a theoretical concern. In 2009, Egyptian authorities arrested 26 people for planning to attack ships in the Suez Canal and oil pipelines.[2] The Sinai pipeline, which carries natural gas from Egypt to Israel and Jordan, and provides Israel with more than 40 percent of its natural gas supply primarily for electricity generation, has been sabotaged repeatedly in recent months.[3]
THE IRANIAN THREAT
Iran’s threats to close the Straits of Hormuz to international shipping and, thereby, stop the flow of Gulf oil have increased in frequency and intensity recently. Senior Iranian officials have warned explicitly that Iran can—and will—block the Straits in response to any act of aggression. In general, these pronouncements are intended to deter the international community from increasing pressure on Iran and to raise the perceived cost of any military confrontation with it, particularly against its nuclear facilities. Former commander of the Iranian Revolutionary Guard’s naval force, Rear Admiral Morteza Saffari, warned in 2010 that U.S. warships are easy prey for the Iranian navy. Iran also threatened to respond if its ships’ cargoes are subjected to inspections (a step included in a 2010 Security Council resolution on Iran). Iran ended the “Great Prophet 6” maneuvers in July 2011 by firing several supersonic coast-to-sea missiles against moving targets near the Hormuz Straits to demonstrate that the country is capable of disrupting, if not blocking, the Straits and will not hesitate to do so.[4]
Because of America’s military superiority in the Gulf, Iran has placed a priority on acquiring and building a large number of small, fast-moving vessels (some of which are for unmanned use). It also has re-outfitted civilian vessels for military missions. As a result, in recent years there have been reports of Revolutionary Guard naval vessels skirmishing with U.S. ships. These incidents were demonstrative, rather than destructive (the U.S. ships were not actually attacked). They were intended to send a message (“naval diplomacy”) to the United States—namely that Iran sees the Straits as its strategic backyard. In recent months, there have been several near misses between Iranian and American ships because of Iran’s increased military activity. Both sides appear uncomfortable with the rising tensions in the Straits, as evidenced by occasional talk that a “hot line” should be established between the two rivals.
Recent assessments suggest that the American Fifth Fleet is capable of opening the Straits to naval traffic within a few weeks, even if Iran were willing to sacrifice all of its assets, suffer massive retaliation, and potentially lose many of its own oil facilities and export revenues.[5] Such assessments may be based on the fundamental weakness of the Iranian air force, a belief in the American ability to paralyze Iranian positions near the Straits (where Iran stations its coastal defense cruise missiles), and America’s improved ability to remove naval mines. In addition, unlike other vessels such as cargo ships, tankers are hard to sink due to their size, structure, and the fact that crude oil doesn’t burn easily.
Even in the unlikely possibility that Iran could effectively close the Straits for a long period of time, such a move would not be in Iran’s best interests. It would interfere with the import of refined oil to Iran and its export of crude oil (which accounts for some 80 percent of its income). Also, it would undoubtedly lead to a confrontation with the U.S. Navy, which has a clear operational advantage. Unlike Saudi Arabia, Iraq, and the United Arab Emirates, the majority of Iran’s oil exports pass though the waterway.[6]
Yet, even a partial blockade of the Straits with rapid, effective international action to open them, would affect the already volatile global energy market. The impact of even a limited campaign on the market would likely last a long time, beyond the event itself, because of the residual concern about supply disruptions. In order to mitigate these negative effects, three options are available:
1) Tapping into strategic petroleum reserves, half of which are in the United States. In July 2011, because of the impact of the “Arab Spring” on oil prices, there was an international decision to release a limited quantity of oil from American, as well as other reserves.[7] 2) Taking advantage of excess global oil production capacity, which is primarily concentrated in Saudi Arabia. Saudi senior officials have claimed that the Kingdom can produce an additional four million barrels of oil per day, which approximately equals Iranian production capability. 3) Using alternate shipping routes, such as the Saudi East-West and the Habshan-Fujairah pipelines, which can carry up to 5 million and 1.5 million barrels, respectively, per day.
As discussed above, because of its fundamental military weakness, Iran is incapable of blocking the Straits completely for long. Therefore any conflict would focus on disrupting freedom of movement in the Gulf in general, while attempting to avoid a comprehensive campaign that might cost it dearly—militarily, politically, and economically.[8] Within these limits, Iran will continue to take advantage of the Straits’ unique geographical conditions and global sensitivity to tremors in the world’s energy market by threatening to close the Straits. This blustery threat continues to serve the regime well even if it appears contrary to its own basic interests.
That said, any confrontation might develop into a more widespread campaign, where both sides lose the ability to limit its scope in time and space. For example, Iranian harassment actions and U.S.-led counter-actions could precede an attack on the western shore of the Gulf, where there is strategic infrastructure, including ports, refineries, and desalination plants. This possibility undoubtedly would give pause to anyone considering a muscular response to Iran’s threats.
The Hormuz Straits are not the only point of maritime friction with Iran. The Red Sea is becoming an increasingly important Iranian-Israeli arena. Iran reportedly transports and even manufactures weapons in the Sudan to supply terrorist groups in Africa and the Middle East. According to U.S. sources, Israel, in turn, has dispatched its air force to attack Iranian weapons convoys headed for Hamas-controlled Gaza.[9] Israel is increasingly concerned that Iran has invested significant efforts in developing its relationships with several East African countries, including Kenya, Eritrea, Somalia, Djibouti, Tanzania, and the Comoro Islands. For Israel, this is reminiscent of Gamal Abdel Nasser’s initiatives in the 1960s that were intended to provide Egypt with greater ability to block Israeli shipping along the length of the Red Sea. In addition, as part of Iran’s high profile, regional muscle flexing, in 2011, it dispatched ships to the Mediterranean Sea through the Suez Canal, and reportedly for the first time, sent submarines to the Red Sea.
The Iranian threat also has implications for the Black Sea region and the Turkish Straits. Already in 2007, there were reports that the United States might use air force bases in Bulgaria and on Romania’s Black Sea coast to launch an attack on Iran.[10] Recently, Russia complained about the presence of a U.S. Aegis cruiser with antimissile technology in the Black Sea as part of a joint U.S.-Ukrainian naval exercise.[11] The perceived need for deploying such technology on the European continent is an indication, in part, of the growing fear in the West of Iranian intentions because of the increased range of Iranian missiles.
CONCLUSION
Piracy, terrorism, and the growing threat from Iran are problems that the international community is trying to tackle collectively. These problems are not necessarily distinct, as Iran is trying to increase its influence in states with weakening governmental control such as Yemen, partly as result of the “Arab Spring.” Iran is also taking advantage of growing piracy to justify its increasing naval presence in the Red Sea vicinity. These Iranian efforts to project power have turned the waters around the Horn of Africa into another area of maritime friction. The result is that other navies operating in the area are now combating both piracy and Iranian weapon smuggling and muscle flexing.
---- By Yoel Guzansky, Jonathan Schachter and Gallia Lindenstrauss For Foreign Policy Research Institute (FPRI) (Originally published at www.fpri.org)
Yoel Guzansky, Dr. Jonathan Schachter and Dr. Gallia Lindenstrauss are research associates at the Institute for National Security Studies (INSS), Tel Aviv University. For a more detailed version of this issue, see “Power, Pirates, and Petroleum: Maritime Choke Points in the Middle East,” published in the July 2011 issue of the INSS Strategic Assessment
