Written by Ajay Singh

As the war in West Asia enters its fourth week, the latest indications — a US statement of “winding down” but not a ceasefire — are mixed. The prospects for energy availability and the global economy are at a crossroads. Depending on the choices the belligerents make, the war could be near its end — or only the end of the beginning. 

The closure of the Strait of Hormuz beyond the end of March or early April would be cause for deep economic concern globally. Iran has retained firm control of the strait, effectively wielding its principal weapon — the constriction of global energy flows.

Although the US itself is self-sufficient in energy, American consumers are paying the prevailing global prices of fuel. The wish to prevent those from rising higher has led the US to temporarily un-sanction Iran’s own oil exports via the Strait of Hormuz.

Most major countries can’t afford to have energy prices rise so high for so long that they tip the fragile global economy into a severe crisis. 

Where the war has left Europe and the Gulf states

Europe, which along with the then US administration, had negotiated curbs on Iran’s nuclear programme under the Joint Comprehensive Plan of Action of 2015 and rued its subsequent abrogation, is now worried about how to deal with an even more intransigent Tehran. 

Faced with the situation in Ukraine, Europe can neither afford entanglement in the West Asia war nor a prolonged energy crisis. 

Starker still is the predicament of the Gulf countries that have not only lost their main source of income due to the closure of the Strait of Hormuz and faced attacks by Iran, but will have to deal with the economic and regional political aftermath of the war. 

The wealthier ones with smaller populations such as the UAE, Qatar and Kuwait may recover more easily, but others such as Oman and Bahrain will find it much harder. Even Saudi Arabia and Iraq, with vast oil reserves but larger populations may find finances harder to balance. 

As oil and gas prices remain higher for longer, economic anxieties across Asia are mounting sharply. Simply put, the window that the US and Israel had to secure their objectives vis-à-vis Iran is closing. If they continue the conflict beyond the window, then they will have to do so within a much more adverse global political and economic context. 

The escalating energy risk

The Iranian government, having withstood the assassination of its leadership and retained its grip on the country, seems determined to fight on. With more than 15,000 targets having been struck within the country, their arsenal of missiles and drones must surely have dwindled but enough seem to have survived. Although reportedly over 90% of the Iranian attacks are being intercepted, those getting through are enough to cause enormous damage. 

The most severe such damage so far was caused this past week to Qatar’s Ras Laffan LNG complex, in retaliation for Israel’s strikes on Iran’s South Pars gas facilities. Now, the shortage of natural gas looms larger. More than 12 million tons of annual LNG export capacity — 15% of Qatar’s total – was wiped out, and reconstruction is estimated to take 3-5 years.

LNG spot prices have shot up in response, to levels double those prevailing immediately prior to the war. Whilst the start-up of new LNG production in the US, Canada and elsewhere in the coming months should compensate for this, spot LNG prices will nevertheless rise even higher if the Strait of Hormuz remains closed beyond early-mid April, as the closure has taken all Qatari and Emirati LNG supply off the market. 

The Israeli attack on South Pars has destroyed 15% of Iran’s total gas production capacity which supplies Iran’s domestic needs and those of Iraq. 

👁 Strait of Hormuz

Opening up the Strait of Hormuz

It now appears that in the absence of a cease fire, security of merchant shipping through Hormuz, even under naval escort, may be difficult. 

Although the salience of Hormuz to the global economy is well-understood, adequate military means E.g. mine warfare ships do not appear to be at hand. Moreover, despite the experience in Ukraine — where cheap drones have held back powerful land and naval forces — adequate counter measures do not yet seem to be available. There is talk of ground troops sanitizing the Strait’s coastal zone and hinterland of missile and drone threats, which would risk embroiling such forces in a protracted war against an enemy that can employ guerrilla tactics on home ground.

The coastal areas of the Strait have many islands, inlets, hills and fishing villages from where marauding guerrillas equipped with missiles, drones as well as small, fast and expendable armed boats could operate.

Escort of merchant vessels by naval ships may not suffice against such threats. Most of the world’s navies including the US Navy, pre-eminent on the open ocean though it is, may not readily possess the ‘brown water’ capabilities necessary to dominate the coastal zone.

Rapid deployment of anti-drone technology on merchant and war ships will have to be undertaken on a large scale. India’s approach of negotiating safe passage of its merchant ships under escort by the Indian Navy, building on its balanced relations with all has been noted in all quarters.

Under present circumstances, a negotiated solution brokered by a broad range of Asian, Gulf and European countries — while the US, hopefully desiring an end of hostilities, gets Israel on board — may be the best course one could wish for. Whether the belligerents would be willing to negotiate, and what their terms might be, remains to be seen.

Ajay Singh is a management advisor based in Tokyo. He is also a former Shell and Japan Petroleum Corporation executive with considerable experience of the Middle East.