Iran is widely assumed to be responsible for last weekend’s bombardment in Saudi Arabia, in which drone and missile attacks struck two critical Saudi oil facilities, cutting the country’s oil production by 5.7 million barrels per day and reducing global oil supplies by 5 percent. If the Trump administration decides to retaliate militarily for these attacks, the ensuing confrontation would likely to be labeled another U.S. oil war in the Middle East.This would be a serious mischaracterization, however. In this case, oil interests are far more likely to prevent war than provoke it.
A war in the Persian Gulf would profoundly destabilize the global oil system. If the Trump administration strikes Iran, unilaterally or in conjunction with Saudi Arabia, and targets the state’s oil facilities, these attacks will take more resources offline. Although Iran’s oil output has declined significantly since the United States reimposed sanctions in 2018, the country still produces more than 2 million barrels of oil per day and exports about half a million barrels per day of petroleum products and liquefied petroleum gas to a variety of resource consumers. Airstrikes would remove these supplies for the market, while other oil producers are struggling to compensate for the loss of Saudi resources.
Tehran has also threatened to retaliate for U.S. or Saudi military action. If the Iranians targets Saudi oil installations, it could incapacitate additional facilities or interrupt repairs at Saudi Arabia’s Abqaiq and Khurais facilities. The initial attacks on these installations caused far more damage than many industry analyses anticipated, striking core processing facilities, including stabilization towers and storage tanks, with pinpoint accuracy. Even if Tehran was not directly responsible for these attacks, Saudi officials have that the aggressors employed Iranian weapons. If these claims are accurate, Tehran has the capacity to inflict substantial further damage on the Saudi oil industry. Although Saudi Arabia has presumably reinforced its air defense system after this weekend’s attacks, the kingdom’s ability to protect critical oil facilities from drones and low-flying missiles is now uncertain.
Iran could also respond to U.S. and Saudi strikes by attempting to interrupt oil transportation. The Islamic Revolutionary Guard Corps navy has demonstrated its willingness to seize foreign tankers in the Persian Gulf, as it did on Monday and this July. The corps could also disable oil tankers with mines and other explosives, mimicking the attacks that occurred earlier this year.
Finally, Iran could attempt to close the Strait of Hormuz. The state has been threatening to block the waterway for months. And, while Iran’s naval forces may not be able to halt traffic entirely or maintain a closure over the long term, the attempt alone would roil global oil markets. Insurance rates for oil tankers transiting the strait have already increased tenfold between May and September. Any effort to block the waterway would provoke another drastic hike. Oil prices would also soar in response to the heightened geopolitical risk.
An escalating conflict in the Persian Gulf would jeopardize many states’ energy interests. Saudi Arabia would be hit on multiple fronts from an intensified Gulf conflict. Its oil installations would incur additional physical damage, and the state would lose more resource revenue from suspended oil sales. More importantly, state oil company Saudi Aramco’s reputation as a reliable oil supplier would take another severe hit.
Saudi officials have already been scrambling to restore confidence in the national oil company after this weekend’s attacks. Saudi Aramco’s CEO, Amin Nasser, announced on Tuesday that Abqaiq’s output will be restored by the end of the month and that the company’s long-anticipated initial public offering (IPO) will proceed as planned. However, skepticism is rampant, and any additional disruptions will wreak havoc on the company’s valuation, as well as on Saudi leader Mohammed bin Salman’s plans to use IPO proceeds to finance his country’s economic diversification. Fear of further instability limits Riyadh’s room for maneuver. As Robin Mills of Qamar Energy observed, “It will be all but impossible to proceed with the IPO if there are ongoing attacks.”
Conflict escalation in the Persian Gulf would also threaten Chinese and European energy security. Saudi Arabia is currently China’s top oil supplier, providing approximately 17 percent of the state’s crude imports. Chinese consumers also continue to purchase small amounts of Iranian crude, as well as petroleum products, despite U.S. sanctions. European countries have halted purchases from Iran and are less dependent on Saudi oil. However, EU member states still import more than 13 percent of their resources from Gulf oil producers. An intensifying regional conflict would threaten Europeans’ access to these supplies, force them to pay higher prices, and undermine their ongoing diplomatic efforts to return Iranian crude to the global oil market.
Unsurprisingly, Chinese and European officials have adopted a cautious attitude toward the crisis. Although China’s foreign ministry condemned the attack, spokesperson Hua Chunying advised the parties “to avoid taking actions that bring about an escalation in regional tensions.” She also refrained from attributing responsibility for the strikes to a specific actor. German Chancellor Angela Merkel and British Prime Minister Boris Johnson pushed for an international response to the attacks. However, they also emphasized the “importance of avoiding the further escalation of tensions in the region.” Given this reticence, if the United States wants to strike Iran, it will have to go it alone.
However, the Trump administration also has strong incentives to avoid conflict escalation. Although the United States is now the world’s leading oil producer, as President Donald Trump recently observed, the country is not immune to instability. The oil market is global, so even if the United States becomes a net oil exporter, it will still be affected by rising oil prices. U.S. refineries will pay more for crude, regardless of where it originates. And when they pass this price hike on to their customers, Americans pay more at the pump.
So far, attacks attributed to Iran haven’t resulted in a military confrontation with the United States.
Rising gasoline prices are never popular. However, they are especially dangerous in an election year. The hit to American pocketbooks could immediately undermine support for Trump’s reelection. Persistently elevated oil prices could push the country into recession, further harming his prospects.
This risk would be lessened if the Trump administration convinced U.S. voters that protecting Persian Gulf oil flows is a vital national security interest. However, this would be an uphill battle. These days, Americans have little interest in wasting money and lives to prop up any Middle Eastern governments. The Saudi regime is particularly unlikely to engender popular support because of long-standing hostility prompted by Saudi citizens’ involvement in the 9/11 terrorist attacks, the state’s treatment of women, and more recent revulsion at the murder of the Saudi journalist Jamal Khashoggi. Sensing a political opportunity, Trump’s opponents have been rushing to express their opposition to U.S. military action. One of them, Democratic Sen. Tim Kaine, said that fighting to defend Saudi oil would be “a colossal mistake”
The Trump administration seems to have gradually recognized the political price it could pay for conflict escalation. Although the president initially responded to the attacks on Saudi Arabia by tweeting that the United States was “locked and loaded” for a military strike, by Monday, he was refusing to definitively claim Iranian responsibility. Trump also told reporters that he wanted to avoid additional wars and that if the Saudis wanted U.S. support, they had better be prepared to pay for it. Although today’s call for stronger sanctions penalizes Iran, it stops far short of military action.
This collective reluctance to retaliate, on the part of the United States, the European Union, China, and Saudi Arabia, means that whoever perpetrated the attacks on Abqaiq and Khurais may get away with it. Other countries’ dependence on oil resources and revenue has tied their hands, since escalating the current conflict will threaten their core energy interests.
These constraints give Tehran extraordinary freedom of action. And, while Iran may not have been responsible for this weekend’s attacks, they advanced a number of its interests. First, the strikes harmed Saudi Arabia, Iran’s adversary in Yemen and rival in the wider Gulf region. They revealed the vulnerability of the kingdom’s oil industry and threatened Saudi Aramco’s long-anticipated IPO. Second, if the Trump administration decides to retaliate for the attacks, unilaterally or in conjunction with Saudi Arabia, it will intensify the United States’ diplomatic isolation. Third, by increasing the geopolitical risk premium attached to oil prices, the strikes may persuade oil consumers that it would be safer to lift international sanctions, both to enable Iran’s oil to return to the market and to reduce the state’s incentives to attack its neighbors’ oil facilities.
U.S. officials will be loath to refrain from retaliation, let alone relax Iranian sanctions, as these concessions would reward apparent international aggression. However, striking Iran or strengthening oil sanctions will not solve the problem. As long as sanctions are enforced, Iran’s economic crisis will persist. As it intensifies, the regime will become increasingly desperate. Tehran will cease to view other countries’ oil dependence as an opportunity to be exploited through limited, carefully targeted strikes. Instead, with its back against the wall, it will have every incentive to go for broke.
We’ve seen this trajectory before. In 1990, Iraq’s escalating economic crisis, exacerbated by the state’s declining oil revenues, prompted Saddam Hussein’s invasion of Kuwait. Contrary to popular interpretations of the conflict, the former Iraqi president did not believe that the United States would refrain from retaliating for his aggression. Instead, he assumed that the George H.W. Bush administration would strike back, economically and militarily. This conviction derived from Saddam’s long-standing belief that the United States was determined to destroy Iraq and overthrow him. Saddam invaded Kuwait because he thought that seizing its oil offered his only possible pathway to survival.
If the Iranian regime is backed into a corner, it is likely to make a similar decision. Persuaded that the United States is unremittingly hostile, and with its survival on the line, the regime will turn to international aggression, despite its limited prospects for sustaining Iran politically or economically. This desperate assault is likely to be significantly less discriminating and more destructive than this weekend’s attacks. Accordingly, while the Trump administration is understandably reluctant to reconcile with a suspected aggressor, it may have little other choice. Until countries are less constrained by their dependence on oil resources and revenue, Tehran has them over a barrel.