A general view of the Port of Kharg Island oil terminal, located 25 km off Iran’s coast in the Persian Gulf and 483 km northwest of the Strait of Hormuz, in Iran on March 12, 2017.
Fatemeh Bahrami | Anadolu | Getty Images
President Donald Trump’s order to attack Iranian military assets on Kharg Island has thrust one of Tehran’s most critical oil hubs into the center of the escalating US-Iran conflict.
Trump said the strikes on Friday night targeted military facilities and spared oil infrastructure. But he warned that the United States could attack crude facilities on the island if Iran continued to attack commercial vessels in the Strait of Hormuz, a major shipping artery for global energy supplies.
“The strike on Kharg’s military facilities will serve as a warning shot to Tehran. If it does not reopen the Strait of Hormuz, the oil infrastructure on the island will be next,” Vandana Hari, founder of Vanda Insights, told CNBC in an email on Monday.
Kharg Island is considered one of Iran’s most sensitive economic targets. The five-mile-long atoll, located in the northern Persian Gulf about 15 miles off the coast of mainland Iran, handles roughly 90% of the country’s crude exports. It has a loading capacity of about 7 million barrels per day, making it a critical gateway to Tehran’s energy revenues.
Iran’s economic lifeline
A direct hit to Iran’s export terminal on the island would immediately halt its crude exports of 1.5 million barrels per day, data provided by JPMorgan showed.
“The destruction of its oil infrastructure will take years to rebuild, depriving the country of its most critical source of income,” Hari added.
“War-risk insurance premiums are likely to increase even after the last missile is launched. And the behavioral response … (will) repeat the supply chain forever.”
Jeff Currie
Chief Strategy Officer, Energy Pathways, Carlyle
Energy analysts said Washington’s focus on Kharg Island reflects both the island’s strategic importance to Iran and its leverage over global oil markets.
“Iran has other ports, but perhaps if the US takes control of or destroys Kharg Island, it’s possible to do the same to other export facilities,” said Josh Young, chief investment officer at Bison Interests.
Damage to the facility could significantly disrupt exports, although Iran has some limited alternatives, said Andy Lipow, president of Lipo Oil Associates.
Lipov noted that Iran could use its Goreh-to-Jusk pipeline, which can bypass both Kharg Island and the Strait of Hormuz, to transport roughly 1.5 million barrels per day.
Even so, analysts warn that the attacks on Kharg Island represent an even bigger escalation.
“(Tehran) escalates by attacking more energy infrastructure in the region, for example, Abqaiq in Saudi Arabia,” said Edward Fishman, a senior fellow at the Council on Foreign Relations, referring to the kingdom’s massive oil refining facility.
Carlyle’s Jeff Currie spoke about how price conflict is accelerating structural change in energy supply chains.
Damaged infrastructure on Kharg Island cannot be repaired under fire, the former Goldman Sachs commodities chief wrote in a note.
“War-risk insurance premiums last long after the last missile is launched. And the behavioral response — procurement, contract renegotiations, scramble for alternative suppliers — will repeat the supply chain forever,” he added.
Currie said the world is moving toward a new energy model where security risks are embedded in commodity prices.
On Monday, the price of crude oil reached 100 dollars per barrel. Brent prices, the international benchmark, were up 0.88% at $104 per barrel as of 9:48 pm ET.
“Each commodity that must carry a checkpoint may carry a security premium,” Currie wrote.
The threat to the oil markets, i.e. Kharg Island, could be as real as a strike.
— CNBC’s Sam Meredith contributed to this report.
(tags to translate)Energy
