Why protecting Bab Al-Mandeb is a global responsibility
First, it was pirates; now it is Houthis.
Almost 10 years ago, the oil market was shocked by the news that a Saudi oil tanker, Sirius Star, was hijacked by Somali pirates.
The very large crude carrier, which was carrying its full load of 2 million barrels at the time of the incident, was hijacked in November about 830 kilometers southeast of Kenya as it was sailing to the US. The tanker was eventually released in January 2009.
That incident brought the attention of the world to the issue of piracy. In the interconnected world of today, some things that happen far away can affect consumers everywhere.
Yesterday, another attack on a Saudi ship took place in the strait of Bab Al-Mandeb, and this time it was by perpetrated by Houthi rebels in Yemen, according to a statement from the Saudi energy ministry.
A decision was taken quickly to halt all oil and product shipments in the Red Sea that go through the narrow channel.
Although Saudi Arabia exports most of its crude through the Strait of Hormuz, the militia attack is significant because it adds to the risks of using this key artery. It is important for oil and products tankers that go from and to Europe. Countries such as Kuwait, the UAE, Iraq, and Iran all use it to reach Europe
The waterway allows for exports into the European market via either the Suez Canal or the Sumed pipeline that links the Red Sea with the Mediterranean through Egypt.
Saudi Arabia is already shipping oil and products from Yanbu port on the Red Sea to Europe via the Suez Canal. It still can use its East-West mega-pipeline to ship crude from its oil fields in the Arabian Gulf into Yanbu, bypassing the strait and keeping the European market within regular reach. The East-West pipeline has a carrying capacity of about 5 million barrels a day.
The impact of the Saudi move on the oil market and prices is limited for now since only a small fraction of Saudi oil and products goes through Bab Al-Mandeb.
Brent crude rose as much as 1.1 percent in London on Thursday not only on the news of the Saudi halt but also because of the fall in US weekly crude inventories.
The real impact would be felt if other countries followed suit and halted shipments.
A full closure of Bab Al-Mandeb, which at its narrowest point is just 18 miles (29 kilometers) wide, would force tankers sailing from Saudi Arabia, Kuwait, Iraq and the UAE “around the southern tip of Africa, which would add to transit time and cost,” according to the US Energy Information Administration.
The EIA estimates that in 2016 — the last year with reliable data — 4.8 million barrels a day of crude and petroleum products flowed through the strait, with about 2.8 million going northbound toward Europe, and another
2 million sailing from Europe into the Middle East and Asia. The strait is an important route for European refined oil products to reach global markets.
By comparison, the Strait of Hormuz had significantly higher flows — 18.5 million barrels a day — in 2016, according to the EIA. Iran’s revolutionary guard has threatened to halt shipments via Hormuz in response to US sanctions.
So until the full closure of the strait, things appear under control for the market. However, how can the world’s oil community be sure that the waterway is safe?
Iran, like many others, uses the strait and the Houthis are allies of Iran — which may offer some solace.
The real problem arises when Iran stops exporting to Europe as a result of the sanctions. Will Iran make sure that the waterway is safe from Houthi attacks?
The world reacted to the pirate attack on Sirius Star by increasing patrols in the area by NATO and Indian warships. This time the issue may affect the Europeans more than the Americans.
Another concern is that countries might react too late. It took one large Saudi oil tanker to disappear in order for countries to react to other attacks on vessels from Somalis. Will the world’s powers wait longer this time before they ensure the safety of this vital waterway?
Ensuring the movement of oil is important for all consumers and producers, including the Americans. Oil prices are already high and it is not in the interests of the US to see them go any higher.
As for the Gulf states, they have discussed contingency plans previously in 2012 and 2013 in the event of a Strait of Hormuz closure. Since Iran or Iran-backed militias are now posing a threat on both waterways, it may be time to update those plans.
Wael Mahdi is an energy reporter specializing on OPEC and a co-author of “OPEC in a Shale Oil World: Where to Next?” He can be reached on Twitter @waelmahdi