Executive Summary In recent months, Iran has responded to rising tensions with the United States—particularly the US launch of the “maximum pressure” campaign against Iran—by attacking oil tankers and infrastructure in the Persian Gulf region around the Strait of Hormuz (the Strait). These actions have been designed to signal to the United States, the Gulf states, and the international community that the American strategy of strangling Iran economically will not be cost-free, and to Saudi Arabia in particular that it is highly vulnerable to Iranian retaliation. As the Strait of Hormuz is one of the world’s most critical energy chokepoints, the implications of Iran’s efforts merit close scrutiny and analysis. This study was designed to examine three scenarios for military conflict between Iran and the United States and assess the potential impacts on global oil prices—as one specific representation of the immediate economic impact of conflict—as well as broader strategic implications. The three scenarios are: Increasing US-Iran tensions that ultimately lead to a new “Tanker War” scenario similar to the conflict of the 1980s, in which Iran attacks potentially hundreds of ships in the Persian Gulf and Gulf of Oman over a prolonged period while also launching missiles at Gulf oil infrastructure. An escalation of tensions between Iran and the United States in which Iran significantly increases the scope and severity of missile attacks directed at major oil and energy infrastructure in Saudi Arabia and the UAE. A major conflict between Iran and the United States that includes damage to Gulf oil infrastructure and a temporary closure of the Strait of Hormuz. Its main conclusions are: The risk of a major military confrontation between the United States and Iran has increased in recent months but still remains relatively low, as neither the United States nor Iran wants war.

That said, the September 14, 2019, attack on the Abqaiq and Khurais facilities was a strategic game changer and shows that the biggest risk is a prolonged, low-intensity military conflict. The fact that Iran was willing to conduct such an attack was a surprise to most analysts and to the US government and its Gulf partners. The level of accuracy it showed in the strike demonstrated a technical proficiency the US government and outside analysts did not believe Iran had.

In the more moderate and likely conflict scenarios, increasing tensions between the United States and Iran are unlikely to dramatically affect global oil prices.

The most profound costs in the more likely scenarios are not energy-related but security-related. Even in the less escalatory scenarios, the United States would be forced into long-term deployments of a large number of air and naval assets that would need to remain in the Middle East for years at a cost of billions of dollars. Such deployments would take away resources that would otherwise be dedicated to managing great power competition with China and Russia. In the more extreme conflict scenarios, major loss of life and an even bigger and longer-term American military deployment would be expected.

In the lower likelihood scenario of a major military confrontation between the United States and Iran, global oil prices would be dramatically affected, though price impacts would not be prolonged.

All assumptions about the potential impacts on oil prices are based on the supposition that the United States protects global shipping lanes, but that theory deserves further scrutiny. For more than a generation, the United States has viewed securing global shipping lanes that are critical for commerce and energy as a core vital interest. But given the isolationist tendencies in the United States and President Donald Trump’s attitude that America should stop underwriting the defense of its allies, it is conceivable he may choose not to respond in the types of scenarios described in this paper or demand that countries most dependent on oil trade from the Gulf—most notably China—step up instead.

Another wild card for oil prices in a major crisis scenario would be President Trump’s unpredictable policies regarding the Strategic Petroleum Reserve. Typically, an administration would be expected to coordinate an international response with the International Energy Agency (IEA) to release the SPR of a number of countries, but this cannot be assumed in the current administration. Though these conclusions are to some extent comforting, the authors acknowledge that a key issue with any analysis of this situation is the unpredictability of the United States. In the present moment, neither US adversaries nor partners know quite what to expect—and, for that matter, neither does the US government or its observers.

Introduction In recent months, Iran has responded to rising tensions with the United States by attacking oil tankers and infrastructure in the Persian Gulf region around the Strait of Hormuz (the Strait). The Trump administration has ramped up its “maximum pressure” campaign against Iran and driven down Iranian oil exports in an effort to wring concessions from Iran. Iran has responded with attacks at Fujairah Port in the United Arab Emirates (UAE) in May 2019, in the Gulf of Oman in June, and on Saudi oil infrastructure facilities in September. These actions have been designed to signal to the United States, the Gulf states, and the international community that the American strategy of strangling Iran economically will not be cost free and to Saudi Arabia in particular that it is highly vulnerable to Iranian retaliation. The United States Energy Information Administration (EIA) refers to the Strait of Hormuz as “the world’s most important chokepoint.”1 Almost one-third of all global oil and petroleum product exports pass through the Strait of Hormuz daily. Additionally, more than one-fourth of all global liquid natural gas exports and various consumer goods pass daily through the Strait.2 It is precisely this importance that has allowed Iran to use threats to the Strait of Hormuz as a bargaining chip in international politics. From a defensive posture, the threat to “close the Strait” and throw global oil prices into disarray is the closest option Iran has to a nuclear option. Iran’s actions in the Strait of Hormuz are also offensive. Brinksmanship in the Strait of Hormuz creates an opportunity for Iran to gain leverage on the world stage. But actually closing the Strait is equivalent to a nuclear option that Iran’s leadership is likely to employ only if it felt that the regime was under threat. Still, it is important to ask what happens if tensions do get out of control. Even though neither the United States nor Iran wants a major military confrontation, the two countries may blunder their way into one. Both sides have a poor track record of understanding each other’s redlines and escalation ladders. The lack of direct channels of communication further increases the likelihood of a conflict neither wants. Indeed, in June 2019, the United States nearly bombed targets inside Iran after Iran shot down an American drone. This study examines three scenarios for military conflict between Iran and the United States (see table 1) and assesses the potential impacts on global oil prices—as one specific representation of the immediate economic impact of conflict—as well as broader strategic implications. The three scenarios are: 1. Significant Escalation Short of All-Out War Increasing US-Iran tensions that ultimately lead to a new “Tanker War” scenario similar to the conflict of the 1980s, in which Iran attacks potentially hundreds of ships in the Persian Gulf and Gulf of Oman over a prolonged period while also launching missiles at Gulf oil infrastructure.

Iran launches attacks on oil tankers, U.S. assets, and Gulf oil infrastructure in the areas around the Strait of Hormuz.

2. Major Infrastructure Damage An escalation of tensions between Iran and the United States in which Iran significantly increases the scope and severity of missile attacks directed at major oil and energy infrastructure in Saudi Arabia and the UAE.

Iranian attacks on tankers and U.S. assets in the Strait of Hormuz continue while its attacks on Gulf oil infrastructure escalate severely.

3. Strait Closure and Major Infrastructure Damage A major conflict between Iran and the United States that includes damage to Gulf oil infrastructure and a temporary closure of the Strait of Hormuz.

Iran closes the Strait of Hormuz using mines, small boats, submarines, and missiles. The United States strikes Iranian naval bases, nuclear facilities, and mine and missile depots.

The good news is that it would take a serious conflict to dramatically affect oil prices over a substantial period of time. Even a conflict similar in scope to the 1980s Tanker War—in which 190 international oil tankers were attacked over the span of four years—would have only a marginal impact on global oil prices. If Iran were to also use its missile arsenal to scale up attacks on oil facilities in Saudi Arabia, the UAE, or other Gulf Cooperation Council states, the effects on oil prices would be more disruptive. In many cases the price shift would not be dramatic, and the market could recover relatively quickly. The key determinants would be the size, scale, and effectiveness of the attack as well as the oil price and market dynamics at the time in question. If, however, in the most extreme scenario, Iran and the United States were to engage in a major military conflict, effectively closing the Strait of Hormuz and causing significant damage to oil infrastructure in the Gulf, the impacts on oil prices would be more significant. Upward of 20 million barrels per day would go off the market and would have to be compensated for with the release of International Energy Agency (IEA) Strategic Petroleum Reserves (SPR). Assuming a price of $65/barrel precrisis, oil prices could still rise to $175–$200 per barrel in the immediate aftermath before dropping to $110–$170 after one month, $95–$125 after six months, and $80–$100 after a year. Despite these dire scenarios, a key conclusion from the authors’ analysis is that the impacts on oil prices from a US-Iran crisis in the Gulf are significant but potentially overestimated by experts and policy makers who view Iran’s ability to close the Strait as a major source of leverage. It is only in more extreme scenarios that a dramatic shift in oil prices is seen, and in those scenarios, significant security concerns and a severe public reaction would also be seen. The good news is these scenarios are also the least likely as none of the parties are interested in pursuing massive escalation and have shown little will to do so even as the crisis in the region has worsened. That said, there are a number of profound negative implications that come from a major war between the United States and Iran. First, the reason the implications for the oil market would be so limited is because the authors assume the United States would be willing to invest tremendous military resources to protect the international oil market. But this is obviously a huge cost in itself. In the aftermath of a conflict, the United States would likely be forced to maintain a significant air and naval presence in the Persian Gulf in perpetuity, undermining efforts to refocus American military power on great power competition with China and Russia and costing the US taxpayers billions.

Moreover, it is unclear what this administration’s unpredictable, often isolationist strategy might mean for both a unilateral release of the United States’ SPR and collective release of IEA member states’ strategic reserves. Since the biggest consumers of Middle Eastern oil are in Asia, the Trump administration might choose to not release the SPR and instead pressure China to make economic concessions elsewhere. It might also demand that South Korea and Japan cover the bill of the American military intervention. Or the administration could go a step further and, in an extreme scenario, refuse to intervene militarily, believing the US should no longer be footing the bill for securing shipping lanes out of the Middle East because the United States is not one of the major importers of Middle Eastern oil. Any of these steps could have unpredictable impacts on global prices and the broader international regime that has been in place to try to insulate the global economy from oil supply shocks. Finally, and most importantly, war is an ugly and unpredictable affair that often results in unforeseen consequences and significant death and destruction. Thus, while the authors’ conclusion is that the impact on the global oil market from any such conflict might be less significant than currently expected, the authors do not in any way believe that a war between the United States and Iran is therefore advisable.



Overview of conflict scenarios and implications for oil supply, price Scenario Description Results Supply impact Price impact Likelihood 1. Significant escalation short of all-out war Months- or years-long conflict that escalates, similar to the Tanker War, coupled with limited missile attacks on Gulf oil infrastructure on the scale of the September 14, 2019, attack Long-term increased US deployment of naval, missile defense, and intelligence, recognizance, and surveillance assets to the Gulf Small, short-term fluctuations Immediate, limited spikes due to sentimental reactions to small, short-term supply fluctuations Already started at a low scale, and certainly conceivable if both sides continue to escalate 2. Major damage to Saudi or UAE infrastructure Iran uses missiles to launch an extensive strike that successfully damages major Saudi and UAE energy infrastructure Previous scenario plus significant damage at Fujairah Port and Abqaiq stabilization facility, requiring one to two years to return to full capacity 12–24 months of 5.5 million barrels per day (bpd) oil loss, phasing down over time to zero Prices spike immediately to $90–$120/barrel, but one-year post-crisis fall to $65–$75/barrel Less likely than the first scenario but certainly plausible given the current trajectory 3. Closure of the Strait of Hormuz plus major damage to Saudi or UAE infrastructure Previous scenario plus a limited two- to four-week conflict in which the United States destroys Iran’s naval capability but Iran mines the Strait and uses other weapons to limit access to the Strait Previous scenario plus 4–10 weeks of no passage of tankers through the Strait 4- to 10-week loss of 24.8 million bpd followed by additional 9 months to 2 years of 5 million bpd loss, phasing down over time Prices spike immediately to $175–$200/barrel, and one-year post-crisis fall to $80–$100/barrel Relatively unlikely, unless we experience a major escalatory event or miscalculation

Note: Prices assume a predisruption $65/barrel Brent price.