The US National security Advisor Bolton announced on 5th May dispatch of a carrier task force headed by USS Abraham Lincoln to the Middle East in response to troubling “indications and warnings” from Iran. President Rouhani on 8th May suspended export of enriched Uranium and Heavy Water by Iran for a period of 60 days to persuade E-3 (UK, France and Germany) to provide sanctions relief as part of the nuclear deal. He added that this surgery was needed to save the deal, not destroy it. The announcement was made symbolically on the day, when President Trump announced US withdrawal from the Joint Comprehensive Plan of Action (JCPOA) or the nuclear deal a year ago. Two Saudi tankers and a Norwegian vessel suffered mine attack off Fujairah on 12th May, and an attack on Saudi oil pipeline by armed drones took place two days later.
Increase in geo-political tensions in the Gulf coincide with tightening oil supply situation, and increase in prices. ‘Zeroing down’ of Iranian crude oil exports with the end of sanctions waiver announced by US Administration on 22nd April may remove around 1.3 million barrels per day (mpd) of oil supply from the world market. Venezuelan crude production has fallen by nearly 5,00,000 mpd since January on account of political trouble in that country. Fresh out-break of fighting in Libya with advance of General Haftar’s army on Tripoli on 4th April would affect Libyan oil exports. Before the new round of fighting, Libya was producing nearly 1.1 mpd of crude oil. These together could result in loss of more than 2 – 2.5 mbd of global crude oil supply.
The OPEC crude oil basket has gone up from $ 52.17 per barrel in the beginning of January 2019 to $ 71.26 per barrel now. This amounts to nearly 36.59 % increase. The increase in Indian crude oil basket from $52.43 per barrel to $71.38 per barrel during this period mirrors the increase in OPEC bench-mark. The oil prices have held up so far despite the increase in geo-political tensions due to fear of tariff war between US and China, which has dampened the sentiment. However, any major incident in the Gulf could trigger further increase in oil prices.
The escalatory cycle began a year ago, when President Trump announced US withdrawal from the nuclear deal on 8th May 2018. This was despite Iran complying with provisions of the nuclear deal, as certified by International Atomic Energy Agency (IAEA). This position was also endorsed by E-3 (UK, France and Germany) apart from Russia and China. There was a surge in oil prices till early October, when under pressure from US Saudi Arabia stepped up production. President Trump was keen to restrain the price on the eve of US Congressional elections. With this end in view, he also granted waiver to 8 countries importing Iranian oil. This factor is no longer available to restrain US actions.
The increase in crude oil prices is not simply driven by US actions. OPEC Plus, a group of countries including OPEC and non-OPEC producers led by Russia has consciously followed a policy of limiting production to boost prices. This group capped production at November 2016 level (32.5 mbd) ignoring growth of world economy and oil demand in intervening period. This ceiling was maintained even after President Trump’s decision last year to withdraw from the Iran nuclear deal and substantial reduction in Iranian exports after 5th November.
The OPEC plus accord of November 2016 for restricting production level was set to expire in December 2018. Instead, it has been extended. The new production ceiling is bench-marked at October 2018 level of 32.176 mbd. This is even below the ceiling of two years ago. The OPEC production stood at 30.022 mbd in March 2019. This is 2 mbd even below the production level adopted by OPEC itself in December last.
The combination of geo-political tensions, disruption in supplies and policies of OPEC plus to restrict production will keep the prices high. Saudi Arabia has spare capacity of more than 1 mbd, but is constrained by OPEC plus accord from increasing production. Its geo-political interests converge with US; its economic interests coincide with Russia’s for maintaining high oil prices. Russia, like Saudi Arabia, stands to gain by increasing production. No exporter wants to lose market share. However, Russian political interest may not lie in supporting US policies in the Middle East.
President Putin will have a key role to play in deciding policies of OPEC plus. A coordination committee of Oil Ministers of OPEC plus will meet in Jeddah on 19th May. But this committee’s mandate is limited to monitor compliance with earlier decision. The current production level will be reviewed in June.
Pompei’s visit to Moscow for discussions with Lavrov underlines importance of the Russian role in both political and economic sphere. Earlier, Moscow was visited by Javed Zarif, the Iranian Foreign Minister. The latter also visited Delhi to meet EAM. Pompei has also visited Brussels to meet Foreign Ministers of E-3 – UK, France and Germany, before his visit to Moscow. E-3 has counseled restraint.
Iran so far remains within the parameters of the nuclear accord. It will breach the accord only in case it exceeds the enrichment level of Uranium, should it wish to do so after 60 days warning to persuade E-3, who were signatories to the nuclear accord, to provide sanctions relief. This is unlikely. For UK, France and Germany, US is by far the larger market than Iran, apart from being an alliance partner.
‘Zeroing Down’ of oil exports represents an existential threat to Iran. This leaves them with little choice, but to resist what they see as US attempt to force a ‘regime change’. The choice has been made even more complicated by US designation of IRGC (Iran Revolutionary Guards Corps) as a terrorist group.
Neither side may want a war. But the chances of mis-calculation are high. The increase in tensions in the Gulf comes at a time when the Middle East Peace Process remains frozen. Hamas has carried out 700 missile attacks on Israel; Israeli airforce has carried out 300 air strikes against Gaza. There is also unsettled situation in Syria and Yemen. The US has announced withdrawal of personnel from Iraq. The build-up comes during Holy month of Ramadan. That brings memories of ‘Road to Ramadan’ – the book written by Mohammad Heikel about 1973 war. There is still time to pull back. War does not serve interest of any country. There are nearly 7 million Indians in the Gulf region. A $ 10 increase in the oil price, if sustained, could add more than Rs 100,000 crore per annum to India’s import bill.
(The author is a former Ambassador to Iran, and currently Distinguished Fellow, VIF. Views expressed are personal.)